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More federal spending: New deal or raw deal?

Created on January 7, 2009

More federal spending: New deal or raw deal?

Tax Cuts for Investors, Not Massive Spending, Creates Jobs

By Ken McIntyre

After his swearing-in Jan. 20, the first order of business for President Barack Obama and the new Congress will be to get the economy back on track.

Already, Democratic and Republican congressional leaders are assembling a bill to "stimulate" the economy by spending somewhere between $700 billion and $1 trillion of the taxpayers' money. The budget deficit could balloon from $1.2 trillion to $1.6 trillion or more.

This unprecedented action -- equivalent to as much as one-third of last year's entire federal budget -- could do far more harm than good if President Obama and Congress aren't careful, budget experts at The Heritage Foundation warn.

And the New Deal isn't the model to follow. Despite the rosy accounts of today's cheerleaders for government spending, President Franklin D. Roosevelt's job-creation programs in the 1930s never succeeded in pushing the unemployment rate under 20 percent -- much less back to the neighborhood of 5 percent, the "normal" jobless rate.

In their paper, Heritage experts J.D. Foster and William Beach argue that the centerpiece of an effective stimulus policy should include two elements:

  • Extending the tax reductions of 2001 and 2003 for as long as possible -- and through at least 2013 -- to prevent tax increases. Better yet, make the tax reductions permanent.
  • Reducing tax rates on individuals, small businesses and corporations through 2013 by lowering the top rate by 10 percentage points and reducing rates by similar amounts for lower-income taxpayers.

In a guide to Heritage's prescribed "dos" and "don'ts" of economic stimulus plans, economic research coordinator Nicola Moore writes: "The ultimate test for distinguishing a good stimulus idea from a bad one is this: Is the proposal likely to raise the economy to a sustained, higher level of growth, or will it slow or stall the economy?"

Two of the big "don'ts" she lists are:

  • Don't spend public money in hopes of driving growth. Economic growth -- the act of producing more goods and services -- can be accomplished only by making American workers more productive. Productivity is driven by individuals and entrepreneurs operating in free markets, not by Washington spending and regulations.
  • Don't try to create jobs with frivolous spending on highway and other transportation projects. Studies by the Congressional Research Service, Government Accountability Office and Congressional Budget Office conclude the positive effect of transportation spending on jobs would be much less than anticipated -- in fact, highway construction could have a negative effect on the economy.

Ken McIntyre is the Marilyn and Fred Guardabassi Fellow in Media and Public Policy Studies at The Heritage Foundation.