Stimulus: Is it timely, targeted and temporary?
Kurt Brouwer February 6th, 2009
I believe most Americans support some of form of stimulus for the economy. I do. Currently, the Senate is debating the stimulus bill that recently passed in the House of Representatives. In terms of size, this legislation is perhaps the largest appropriation bill in our country’s history. The Senate version is priced at about $900 billion currently. The House version was a bit less. With interest, the cost of the smaller House version would still be about $1.1 trillion. The Senate version would be more.
It’s safe to say that, in order to be effective as economic stimulus, any legislation we consider needs to stimulate the economy now, not a few years from now. That is, to be beneficial, the stimulus has to come very quickly.
And, secondly, the stimulus has to go to activities that contribute to economic growth and produce permanent jobs.
Third, the stimulus has to go away pretty quickly too so that we do not have lots of highly inflationary government spending coming along when the economy heats up in 2010 and 2011. Therefore, the stimulus has to be:
- Timely
- Targeted
- Temporary
Here is a chart based on data from the Congressional Budget Office. It illustrates how much of the $825 billion stimulus package that just passed the House of Representatives will be spent in 2009, assuming the bill goes through as written:
Data: Congessional Budget Office; Chart: ReadtheStimulus
The Congressional Budget Office report estimates the impact of the stimulus as follows:
Assuming enactment in mid-February, CBO estimates that the bill would increase outlays
by $92 billion during the remaining several months of fiscal year 2009, by $225 billion in
fiscal year 2010 (which begins on October 1), by $159 billion in 2011, and by a total of
$604 billion over the 2009-2019 period…
In addition to the $92 billion in spending, there will be $77 billion in tax cuts hitting in 2009. The good news is that some of the proposed $825 billion economic stimulus package will take effect this year. Unfortunately, much of it will not. But, the report makes it clear that most of the stimulus spending does not kick in until 2010 or 2011 or even later. Unfortunately, spending in 2010 or 2011 does not help us much and it may even hurt.
When we consider any stimulus legislation, we need to ask ourselves — and our Congressional leaders these questions:
Is it Timely? First, consider simple logistics. The House version is very different from the Senate version. So, even if this version passes the Senate, the legislation has to go to a joint committee from both the House and the Senate to hash out a compromise version. Then, this compromise has to be passed by each body again and then signed into law by the president.
When all that happens, the government can finally get going, but each day that passes is critical. The CBO estimate shown above assumes the legislation will be signed and implemented by the 15th of this month. It is now the 6th and we are quite a ways from enactment.A best case scenario is that the tax cuts and tax credits hit this year and a small amount of spending does too.
In a recent Wall Street Journal piece, it was reported that:
The nonpartisan Congressional Budget Office projected less than half of the $355 billion that House Democrats want to spend on highways, bridges and other job-creating investments is likely to be used before the end of fiscal 2010. The CBO said the balance would likely be spent over the next several years, after the recession is projected to end.
It’s probably unlikely that even that estimate would be reached because most infrastructure projects take years to get off the ground. In any case, why not just authorize the spending that will hit in 2009 and 2010? The other spending does no immediate good and it certainly adds to our debt burden. What’s the rush on authorizing projects for 2011, 2012 and beyond?
It would be much better if we had a more modest bill that just included the items that would do some good by hitting in 2009 or early 2010. Anything else should be put into other legislation to deal with alternative energy, infrastructure or whatever.
On a happier note, I was thrilled to see this Wall Street Journal interview with Energy Secretary Stephen Chu because it appears that he has a real sense of the urgency of getting these projects underway:
Energy Secretary Steven Chu said Friday that he wants half of the roughly $35 billion to $40 billion proposed for Energy Department programs in the economic-stimulus package to be spent within a year.
Mr. Chu said he is prepared to overhaul the way the agency operates to quickly direct the money to projects on weatherization, energy efficiency and support for renewable energy.
“We’ve got to do this, and we’ve got to do it in a way that has not been done at the Department of Energy,” Mr. Chu said. “I think this is solvable. And not only solvable — we’ve got to do it. Otherwise it’s just going to be a bust.”
Mr. Chu is already coming under pressure from some lawmakers to set a time line for dispersing a separate $25 billion in loans from an Energy Department program for the struggling automobile industry. In an interview, Mr. Chu said, “We can probably get a time line out in a week or two. We’re trying to understand, why the heck did it take so long before?”
Mr. Chu’s comments highlight a fundamental challenge for President Barack Obama’s effort to transform and revive the American economy. To carry out that change, he is relying on a government bureaucracy that can often be slow-moving, inefficient and bound by multiple missions and red tape…
Even with Secretary Chu pushing hard, the article points out the difficulties faced in dealing with our Federal bureaucracy. Just as one example, most big projects need to have environmental impact statements completed and approved. This process alone often takes years.
Is it Targeted? The list of wacky projects in this legislation is too long to go through, but targeted is not something even the most ardent proponent would claim.
As one commenter at the liberal online magazine Washington Monthly wrote:
…How hard would it have been to come up with a clean stimulus bill containing increases in unemployment benefits, higher earned income tax credits, and targeted tax cuts? Then they could have followed up in MAR-APR with an infrastructure package. Later in the year when the middle class would be selecting their health plans for 2010, he could have come out with a health care program…
Probably the most unlikely and most unpopular item in the bill is $2 billion for an experimental ‘clean’ coal project touted by impeached Illinois Gov. Blagojevich. Even though he has been ousted, his project lives on. Is an experimental coal-fired plant really necessary to get the economy going this year? Is it likely to help this year or even next year?
Here are a few projects in the bill as listed on the conservative publication, National Review Online. To me, these seem like a stretch in a stimulus bill:
$4.5 billion for U.S. Army Corps of Engineers
$87 million for polar icebreaking? $150 million for livestock, honeybees and farm-raised fish? $7.6 billion for rural community advancement? What is that exactly anyway?
No doubt these are all interesting projects, but to just take one example, the U.S. Army Corps of Engineers already has more than $3 billion in unspent funds for other projects it has not been able to get going. Another $4.5 billion won’t do any good because the Corps is already awash in cash. So, this amount won’t do any good at all.
Is it Temporary? Most of the projects extend over several years, some for a decade. And, when you propose a ‘temporary’ increase in unemployment benefits or Medicaid funding, this will almost certainly become permanent. After all, what politician is going to propose ‘cutting’ unemployment benefits or Medicaid funding in a few years?
When we look at longer term effects, the likelihood is that stimulus spending will probably act to slow economic growth.
The Congressional Budget Office Director’s Blog had this to say:
…In contrast to its positive near-term macroeconomic effects, the Senate legislation would reduce output slightly in the long run, CBO estimates, as would other similar proposals. The principal channel for this effect is that the legislation would result in an increase in government debt. To the extent that people hold their wealth in the form of government bonds rather than in a form that can be used to finance private investment, the increased government debt would tend to “crowd out” private investment—thus reducing the stock of private capital and the long-term potential output of the economy…
In other words, we are trading long-term economic growth for this attempt to get us out of the recession. Now, I’m fine with that and I suppose most Americans are too. However, we should only spend what we really believe is necessary now. That way, we get the stimulus we need, but we reduce the negative long-term effects of incurring so much government debt. And, despite the ease with which Congress is debating billions or even a trillion dollars of spending, that’s a lot of dough as this chart illustrates:
Source: Heritage Foundation Blog
- Business , Economy , Geopolitics , Money , income taxes , inflation
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