Spending for Tomorrow

A Critical Look at the Administration’s $819 Billion Stimulus Plan

Barack Obama said in his inaugural address that “our workers are no less productive than when this crisis began; our minds are no less inventive.” America, according to the President, has lost none of its manufacturing prowess from the current recession. Obama followed this with a list of just some of the projects his administration hopes to fund in order to “stimulate” the economy back to productivity.

Obama nailed the first idea, but flubbed on the second. While it is true that America has not lost its skills and potential, the proposed stimulus plans will not promote economic recovery. Unfortunately, that second idea has served as justification for the $819 billion stimulus package that’s currently working its way through Congress.

This proposed stimulus package seeks to “prime the pump,” injecting cash now to get the economy turning again. Its supporters argue that infusions of government money will get businesses to hire more employees and consumers to buy more products. In this specific respect, it follows the Keynesian model by advocating government spending as a way to reduce unemployment.

Proponents laud the stimulus package for the “shovel-ready” projects that it will create, harkening back to previous government investments in infrastructure like the national interstate project and engineering marvels like the Hoover dam.

The problem, however, is that only $355 billion of this bill actually goes to any new government spending: the rest is divvied up to include $275 billion for tax cuts and credits and bailouts to states, municipalities and school districts, among others. Beyond that, it’s still unclear exactly how much money will be available and when. The Wall Street Journal and the New York Times both report that just under two-thirds of the stimulus bill will actually be spent before the end of 2010, but this timing is highly dependent on which component of the bill you look at.

That kind of time frame is just plain wrong for the type of stimulus the pundits claim the economy needs. Since the Great Depression, there hasn’t been a recession in the United States that’s lasted longer than two years, and economists now estimate December of 2007 as the start of the current recession. According to those same estimates ­— which Congress should be basing their plans on — the economy will hit bottom in the second quarter of 2009 and then begin a slow recovery for the remainder of the year. The stimulus bill as written will likely leave the majority of its spending for after the economy has recovered.

That’s the first part of it. The billions in tax cuts that seemed to be designed to appease Republicans are directed mostly towards middle- and lower-income Americans. Many of those who will receive a tax credit don’t pay income tax in the first place, so calling this a “tax cut” is a bit facetious. It’s fine to cut taxes for these groups, as they will spend the money in the immediate term. This might give the economy and Congress’ popularity a quick shot in the arm.

However, experience tells us that this kind of limited-term tax break tends not to produce the desired increases in consumer spending. As it is written now, this tax cut only extends for two years. Temporary cuts in taxes are nowhere near as effective as permanent tax cuts. Does anyone remember the great benefit the economy got from $152 billion in one-time stimulus tax breaks last year? I don’t either.

Unfortunately, small businesses and corporations — the institutions that create productive jobs in America — largely don’t occupy these tax brackets. They still end up paying taxes that are among the highest in the world, which is why some economists suggest lowering the corporate tax rate to promote recovery and greater prosperity in the long term. All of the stimulus spending in the world wouldn’t create jobs in the US if all of the major corporations based their design and manufacturing facilities in more tax-friendly overseas markets.

The rest of the stimulus bill doesn’t fare much better under close examination. Over $200 billion is funneled to various functions of the states — mostly to prevent them from either raising taxes or cutting services. While it makes sense to prevent sharp tax hikes, there are reasons to be wary of this approach. California provides a great example of the economic stagnation, population decline, and waste that comes from running a budget deficit for too long. Any Californians might do well to avoid asking their parents what they intend to do with their 2008 income tax refunds.

These measures also impinge on state’s rights — the very principle that makes the United States a federal republic. They reduce the healthy competition between states for the tax dollars of residents and businesses. If states cannot live within their budgets, they must either curtail their programs or raise taxes themselves, on their own populations. Residents of Massachusetts garner no benefit from improved public housing in Pennsylvania, so it is unconscionable for them to be required to subsidize it.

Then there are the smaller parts of the program, costing from hundreds of millions to a few billion dollars each. On the whole, these parts of the bill read like a laundry list of Democratic objectives: subsidies for alternative energy, funding for neighborhood groups such as ACORN, and increased unemployment benefits, and that’s just the beginning. These components collectively have more to do with buying voter goodwill than stimulating the economy.

To top it all off, all of this discussion completely neglects the source of funding for this “stimulus.” It ignores the massive debt that will be incurred paying for these programs or the larger interest payments that will be incurred in the future. What will that will mean for the future economic standing of the US? Unlike some programs that have the potential to actually increase tax receipts — cutting the corporate tax being one of them — it is highly unlikely that any future growth in GDP attributable to this plan will raise anywhere near the tax funds necessary to cover its cost.

The major parts of this stimulus package just don’t hold up to close scrutiny. The American Recovery and Reinvestment Act of 2009 boils down to an excuse to further expand government influence with little in return. Some have compared this current recession to the Great Depression. I’d broaden the metaphor, comparing this legislative solution with much of the government intervention from that era: expensive, invasive, and, ultimately, ineffective.