Thursday, February 12, 2009

A Stimulus Plan to Nowhere

I posted the following thoughts on a Facebook note on February 4, and it generated considerable debate. It is particularly timely since Congress is expected to pass the final version of the stimulus bill over the next few days.
The riddle constantly implied through the 2008 election cycle was, “Who could possibly screw up our economy worse than the Republicans?” The answer has become fairly obvious: the Democrats!

I normally abhor the partisan Republican-Democrat finger pointing as the lowest form of political hackery. Unfortunately, the Democratic leadership has spent the past few weeks living up to the odious caricatures of bleeding heart big spenders who place their social agendas ahead of economic reality. Specifically, their introduction of a welfare expansion bill disingenuously labeled economic stimulus has forced me to question their intentions and their competence.

President Obama spent the past few months pledging an economic stimulus bill that will boost our economy through infrastructure spending and tax cuts. I am not a fan of Keynesian-style government spending stimulus because, frankly, I don’t think it works. To make a long story short, government can only spend by preventing private sector spending (now or in the future), and it typically takes years for infrastructure spending to enter the economy due to the enormous planning required before ground can be broken. However, I at least acknowledged that such a bill would cause a “placebo effect”: even if it does not in fact stimulate growth, its enactment will inadvertently stimulate growth by boosting consumer and investor confidence.

Unfortunately, the so-called American Recovery and Reinvestment Act does not live up to President Obama’s description. He promised infrastructure, but Congress instead delivered a wish list of liberal policy objectives aimed at expanding the welfare state rather than growing the economy. The $816 billion House version entails $604 billion in new spending.

This includes $20.0 billion for food stamps, $20.4 billion allocated to the Department of Health & Human Services, $17.6 billion for student financial aid, $29.1 billion for public school programs, $20.0 billion to renovate those same schools, $11.2 billion for housing assistance programs, $19.5 billion for education grants, $27.1 billion for unemployment benefits, $13.3 billion for health insurance for the unemployed, $11.1 billion for “Other Unemployment Compensation,” and $20.2 billion for Medicaid and Medicare.

By contrast, only $30.0 billion is allocated to highway construction.

Feeling a bit swindled, now, aren’t we? Check out
an article by Jim Manzi discussing this in further detail.

This plan does not stimulate economic growth; it simply recycles money. What do I mean? Well, understanding the economic impact of this proposal requires comprehension of the basic economic principle that the government cannot “create” spending; it can only spend money that it takes from the private sector, either through taxes or borrowing. The proponents of this proposal claim that it will redistribute wealth from “the rich” to “the needy,” who will stimulate the economy by using their government payments to purchase of goods and services.

In other words, the plan is for the government to take money away from “the rich,” and give it to “the needy,” who will in turn give it back to “the rich” when they purchase goods and services. This clearly does not grow anything, except for the size of government and the size of our national debt. All this does is transfer the same dollars back and forth between the same people, minus the dollars retained by the bureaucratic middlemen within the federal government. This is simply welfare expansion window dressed as economic stimulus.

Republican Senators actually responded—much to my surprise—with a decent alternative. This bill, priced at $445 billion is about half as large as that passed by the House, and is laced with supply-side tax cuts. It slashes payroll taxes for all workers and income tax rates for lower income earners, as well as substantial tax credits for home buyers. The hallmark of the bill, however, is its reduction of the corporate tax rate from 35 to 25 percent, and small business filing as individuals by the same margin.

Talk about incentivizing growth! The United States levies some of the highest corporate tax rates in the developed world, and most people do not realize that most “individuals” taxed at the 35 percent rate are actually small businesses. This will provide them with a much needed shot in the arm to weather the storm and incentivize growth. More money in their pockets translates into fewer layoffs and pay cuts, and—as experience has consistently shown—higher tax revenues. If you don’t believe me, just check the
official Treasury data for yourself. Cross reference the supply side tax cuts of the 1920s, 1960s, 1980s, and 2000s with those figures, and you’ll see that the subsequent economic growth resulted in higher revenues despite the lower rates.

Of course, the Republican counterproposal was not perfect. It still contained $48.15 billion in welfare expansion, but at least its remaining expenditures contain a far higher proportion of infrastructure than its competitor. I also like the fact that its expenditures cease following either three years or two consecutive quarters of 2 percent GDP growth, whichever comes first. Additionally, it called for a subsequent 2 percent across-the-board spending cut to help balance the budget and a commission to examine the long-term viability of Social Security, Medicare, and Medicaid. Too bad the Democratic majority never took it seriously.

Sen. McCain introduced this counterproposal, and you know what? It really makes me think I underestimated him during the election! Maybe he has a chip on his shoulder to prove that he received an unfair shake in November. If so, I really hope it motivates him to remain a vocal proponent of such beneficial measures—perhaps recreate himself as a Supply-Side Maverick rather than a Campaign Finance/Amnesty/Global Warming Maverick.

Meanwhile, President Obama is doing a pretty amazing job of talking down the economy. He recently stated that failing to pass this bill “will turn a crisis into a catastrophe.” Perhaps President Obama and his Democratic colleagues should turn their attention to finding that Hope they used to get elected in November and leave economic stimulus to the Republicans.

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