January 15, 2009 | Commentary on Economy
10 Questions About the Economic Stimulus Bill
The $800 billion economic "stimulus" bill may be more
appropriately called the "Obama debt plan." It will, after all,
dump $6,700 per household of new debt into the laps of our children
Whether it will actually stimulate the economy is another
matter. So perhaps politicians can first answer a few questions
from the back of the classroom:
- President-elect Obama claims that spending approximately $800
billion will create 3.675 million new jobs. That comes to $217,000
per job. This doesn't sound like a very good value, especially with
the national average salary around $40,000. Wouldn't it be cheaper
to just mail each of these workers a $40,000 check?
- Politicians say deficit spending will expand the economy (as if
President Bush's $300 billion budget deficits brought economic
nirvana). If that were true, then the current $1.2 trillion deficit
-- the largest in history -- would already be rescuing the economy.
It's obviously not. So why would $800 billion more of the same
suddenly end the recession?
- We're told that government spending will add new spending power
to the economy. But Congress doesn't have a vault of money waiting
to be distributed: Every dollar lawmakers "inject" into the
economy must first be taxed or borrowed out of the economy.
If government borrows the money from American investors, investment
spending drops accordingly. If it's borrowed from foreigners, net
exports drop accordingly. How does borrowing $800 billion from one
group of people and giving that $800 billion to another group of
people make us wealthier?
- Some answer the previous question by saying that transferring
income from savers to spenders keeps more money circulating through
the economy. That made some sense in the 1930s when people hid
their savings in mattresses because they didn't trust the banks.
But today, people use their savings to pay down debt, invest or put
it in banks -- in each case, making the purchasing power available
to others wishing to borrow. Thus, savings circulate through the
investment spending side of the economy. How does transferring
money out of investment help?
- Policymakers are basing the "stimulus" bill on economic models
that wrongly assume every $1 of government spending increases the
economy by approximately $1.60. Is it really that simple? By that
logic, debt-ridden, big-government countries like Italy, France and
Germany should be wealthier than America. And why stop at $800
billion? Such logic suggests unlimited prosperity could be
guaranteed by the government borrowing and spending $800
trillion. Should America be basing such costly decisions on
these types of economic models?
- Lawmakers tell us every $1 billion in highway "stimulus" can be
spent creating 34,779 new construction jobs. But Congress must
first borrow that $1 billion out of the private economy. Won't the
private sector then lose the same number of jobs?
- During the 1930s, New Deal lawmakers doubled federal spending
-- and unemployment remained above 20 percent until World War II.
More recently, Japan responded to a 1990 recession by passing 10
"stimulus" bills over 8 years (building the largest national debt
in the industrialized world) -- and their economy remained
stagnant. Why do lawmakers believe the same failed approach will
succeed for the U.S. today?
- The economy sank because people over-borrowed for houses they
couldn't afford, and financial institutions over-borrowed for
investments they badly misjudged. Washington's solution is to
borrow $800 billion that it cannot afford. How will adding $800
billion to the national debt (which will also raise interest rates)
solve a recession created by imprudent borrowing? And who will bail
out the American taxpayer when the bill comes due?
- Temporary tax rebates were implemented in 1975, 2001 and 2008,
and most economists agree they failed to help the economy.
Long-term marginal tax rate reductions implemented in 1982 and 2003
both substantially increased economic growth. So why are lawmakers
planning another round of temporary tax rebates, followed by an
increase in tax rates?
- Mayors have pledged to spend stimulus funds on items such as a
mob museum in Nevada, a polar bear exhibit in Rhode Island, and
curbing prostitution in Dayton, Ohio. As National Review asked, how
come one Bridge to Nowhere is a national embarrassment and 1,000
Bridges to Nowhere are a "stimulus?" Given the 11,000 annual
earmarks, why should taxpayers trust politicians to spend this
money better than they would spend it themselves?
Brian M. Riedl is
Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas
A. Roe Institute for Economic Policy Studies at The Heritage
Distributed nationally on the McClatchy wire