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Monday, July 20, 2009

Why the "stimulus" was a bust.

It wasn't a stimulus package. It was a spending orgy.

Actually, there was a lot I liked in the legislation, starting with the actual tangible infrastructure benefits. If you're going to run a deficit, have something to show for it at the end of the day. There was also the necessary assistance to those in crisis:

On humanitarian grounds, hardly anyone should object to parts of the stimulus package: longer and (slightly) higher unemployment benefits; subsidies for job losers to extend their health insurance; expanded food stamps. Obama was politically obligated to enact a campaign proposal providing tax cuts to most workers -- up to $400 for individuals and $800 for married couples. But beyond these basics, the stimulus plan became an orgy of politically appealing spending increases and tax breaks.

And, as has been noted, things like food stamps aren't just humanitarian, they are also an immediate boost to the economy as they get spent right away, and locally. Doing the right thing actually does the right thing for the economy.

The result:

More than 50 million retirees and veterans got $250 checks (cost: $14 billion). Businesses received liberalized depreciation allowances ($5 billion). Health-care information technology was promoted ($19 billion). High-speed rail was encouraged ($8 billion). Whatever the virtues of these programs, the effects are diluted and delayed. The CBO estimated that nearly 30 percent of the economic effects would occur after 2010. Ignored was any concerted effort to improve consumer and business confidence by resuscitating the most distressed economic sectors.

Vehicle sales are running 35 percent behind year-earlier levels; frightened consumers recoil from big-ticket purchases. Falling house prices deter home buying. Why buy today if the price will be lower tomorrow? States suffer from steep drops in tax revenue and face legal requirements to balance their budgets. This means raising taxes or cutting spending -- precisely the wrong steps in a severe slump. Yet the stimulus package barely addressed these problems.

To promote car sales and home buying, Congress could have provided temporary but generous tax breaks. It didn't. The housing tax credit applied to a fraction of first-time buyers; the car tax break permitted federal tax deductions for state sales and excise taxes on vehicle purchases. The effects are trivial. The recently signed "cash for clunkers" tax credit is similarly stunted; Macroeconomic Advisers estimates it might advance a mere 130,000 vehicle sales. States fared better. They received $135 billion in largely unfettered funds. But even with this money, economists at Goldman Sachs estimate that states face up to a $100 billion budget gap in the next year. Already, 28 states have increased taxes and 40 have reduced spending, reports the Office of Management and Budget.

There are growing demands for another Obama "stimulus" on the grounds that the first was too small. Wrong. The problem with the first stimulus was more its composition than its size. With budget deficits for 2009 and 2010 estimated by the CBO at $1.8 trillion and $1.4 trillion (respectively, 13 and 9.9 percent of gross domestic product), it's hard to argue they're too tiny. Obama and congressional Democrats sacrificed real economic stimulus to promote parochial political interests. Any new "stimulus" should be financed by culling some of the old.

Exactly--pullback the promised non-stimulating funds that haven't been provided and pour them into infrastructure construction now. It won't happen, but it would constitute an actual, you know, stimulus.

The lessons the administration should have learned from this outsized failure:

(1) Spending cash by the wheelbarrow doesn't equal Keynesianism, and

(2) Don't delegate your responsibilities to Harry and Nan, who are giants of political infighting but lilliputians when it comes to sustained thought beyond soundbites and Pavlovian reward/punish imperatives.

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