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Magazine / WEALTH OF NATIONS

How The Stimulus Falls Short

Bottom line: The package is significantly smaller and less front-loaded than it looks.

February 21, 2009

Even before President Obama had signed the fiscal stimulus bill on Tuesday, his press secretary was warning that another might be needed. "I think the president is going to do what's necessary to grow this economy," Robert Gibbs told reporters on the way to Denver for the signing. "There are no particular plans at this point for a second stimulus package," he said, but "I wouldn't foreclose it." No pun intended, I imagine.

One of the more remarkable aspects of the country's economic condition is that this $787 billion package seemed to recede into history before it was even on the books. The government had not begun to spend this staggering sum, and attention was already turning to the administration's housing plan, the Treasury Department's still-vague financial stability plan, and even the need for yet another stimulus. I have been pressing the urgency of the situation for months, yet the pace of developments in the past couple of weeks is scary and bewildering.

But what else is new? This is the way Washington works. We have known that the economy faced a severe recession, or worse, for months. First the election campaign and then the extended hiatus between the vote and the new president's taking office paralyzed the government, at least so far as fiscal policy was concerned. After this protracted spell of inactivity, Congress and the administration cobbled together the most expensive piece of legislation in the country's history -- and one of the most complicated as well -- in a few days. The final bill, much amended from earlier versions, was reviewed and pushed through Congress in a matter of hours. Nobody was even pretending to have read the law that is now in effect.

 

Score it as a victory for Obama, to be sure: He got most of what he wanted. Still, it is a strange way to run a government.

The country could have had a better bill, and it should certainly have been given a fuller account of what is in the bill it got. If another big stimulus is needed, as it might be, let us hope that it is better thought through and more carefully examined -- before the fact -- than this one was.

Hidden in the screeds of spending commitments are some very questionable initiatives. The coming months and years will doubtless turn up plenty more. Was it really the will of Congress and Obama to eviscerate the Clinton administration's welfare reform -- a bipartisan measure and widely regarded as a success? Changes in the way work-test conditions will be applied to states' welfare spending appear to have that effect. Did Congress and the administration really want to ban the hiring of skilled foreigners by U.S. financial firms? They seem to have done so.

As for the tight new controls on finance-industry pay woven into the bill, the administration has already signaled that it is unhappy and will loosen them, either through dilatory enforcement or by asking Congress to clarify its intentions.

My guess is that Congress will be busy clarifying this law for years. Important as these individual acts of foolishness or carelessness may be, though, the crucial question about the bill is whether it will have the intended effect on the economy as a whole. Will it stimulate? Will it create or save millions of jobs?

The administration says yes, and I agree. True, the measure grew worse not better as the House and Senate batted it to and fro. No doubt, some of its individual elements are hard or impossible to defend: You cannot pump up spending quickly, which needed to be done, without some waste. Still, I think this measure is much better than none -- and after the previous months of delay, moving quickly was important.

According to the Congressional Budget Office, the law will deliver a stimulus of $185 billion in the remainder of fiscal 2009 and a further injection of $399 billion in fiscal 2010. That represents 74 percent of the total of $787 billion in additional budget deficit over 10 years to 2019. The measure generally meets the standard that Obama set when he first outlined his American Recovery and Reinvestment Plan -- namely, that three-quarters of the stimulus should arrive before the end of 2010.

Democrats seem quite proud of this -- a little odd when you consider that it is tax cuts, which many Democrats were reluctant to allow, rather than spending increases that account for the front-loading. Again according to CBO, 21 percent of the bill's spending falls in fiscal 2009 and 38 percent in fiscal 2010, for a total of 59 percent. The stimulus hits Obama's front-loading target because more than 100 percent of the net tax cuts fall in 2009 and 2010 (the number exceeds 100 because in later years revenues rise slightly).

It is unfortunate that some $70 billion of that front-loaded tax cut is the fix to the alternative minimum tax that the Senate tacked onto the measure. This is a step that Congress would have had to take, stimulus or no stimulus. Otherwise, come April 2010, millions of middle-income taxpayers would have found themselves surcharged under the terms of the AMT with respect to their 2009 income. The fix was necessary, inevitable, and uncontroversial -- and will continue to be, year after year, until Congress can bring itself to revise this ridiculous tax-law provision once and for all. The fix is not stimulative, however, because almost no taxpayers expected to pay the surcharge next year in the first place. As far as they are concerned, the AMT fix has changed nothing.

The bottom line is this: The overall stimulus is significantly smaller and less front-loaded than it looks. The measure provides a boost of about $200 billion this year and more than $300 billion (not counting the AMT fix) in 2010. That is not bad: It is, as I say, much better than nothing. But I would have preferred a stimulus this year and next at least double that size, and there is no good reason why this could not have been done.

Take the spending plans as given. Bigger tax cuts up front, offset later by the phased introduction of tax increases -- or by a new carbon tax, for instance -- could easily have doubled the short-term stimulus and pushed the 10-year cost well below $800 billion (though how that randomly chosen figure came to acquire such totemic status, I cannot understand).

Why did we not get a more powerful short-term stimulus of this sort? Partly because many Democrats set their faces against a larger place for tax cuts in the stimulus formula. Of course, Republicans would have opposed this plan too, because it would have retained the spending increases they dislike and offended the fiscal conservative instincts they have rediscovered now that they are no longer in power. But the bill that passed did so despite near-unanimous Republican opposition, so what Republicans think is mostly beside the point. The fastest way to increase the budget deficit, stimulate demand, and grow the economy is tax cuts -- and most Democrats hate to cut taxes, even temporarily, even in a deep recession.

In the present case, they dressed this reluctance up as a pragmatic argument about so-called multiplier effects. An increase in public spending raises the economy's output, and the level of employment along with it, more powerfully than an equivalent cut in taxes, according to most economists' estimates. The spending multiplier, in other words, is higher than the tax multiplier.

Most likely it is, though I would not bet my job on it. The estimates are uncertain and based on smaller rises in spending than those in this law. (The bigger the increase, the lower the multiplier is likely to be, because of bottlenecks in the supply of resources, especially the right kind of labor.) But assume such estimates are right: Assume that the spending multiplier is higher than the tax multiplier. The difficulty of bringing spending onstream quickly still argues for plenty of faster-acting (though milder) stimulus through tax cuts. Opposing bigger tax cuts on principle even though temporary, even as part of a desperately needed stimulus package, is absurd. It is ideologically induced stupidity at its worst.

Give the administration and Democrats in Congress credit for passing a big fiscal boost quickly. They were right to do it. But the stimulus should have been even stronger and faster-acting. The blame for its shortcomings is all theirs, too.

The stimulus debate is history -- for now. Attention turns to the administration's plan for the housing market, and to the missing details of Treasury's strategy to stabilize the banking system. Those efforts are vital to restoring the economy's health. But if a second big stimulus turns out to be needed, the defects of the American Recovery and Reinvestment Act need to be understood and remembered.

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