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Saturday, January 31, A.D. 2009
Stimulating Disgust

As you probably know by now, the United States House of Representatives, under the misguided direction of Speaker Nancy Pelosi, passed an inexcusably awful “stimulus” bill earlier this week by a wide margin: 244 - 188. Every Republican in the House opposed the bill along with eleven Democrats.

It would be bad enough if the Democrats’ bill were simply the result of an imprudent disregard of our economic ignorance. For we really do not know what will work, if anything. However, the bill is a Left wing pig roast; hand-greasing pork, federal socialist expansion, and gifts at tax payers’ expense to the Democrats’ special interest groups account for the vast majority of the loot.

Naturally, The Wall Street Journal features several informative articles on the stimulus; here is an overview: “House Passes Stimulus Package,” which includes following shocking fact:

Then there is the cost. The deficit, already in record territory, would likely reach between 10% and 12% of the gross domestic product in 2009 and 2010, roughly double the previous peacetime record, according to projections by Decision Economics Inc., a New York economic forecasting firm. That’s partly because of the sheer size of the package, but also the long-term nature of some of the programs.

Without fast action, federal debt levels could soon reach 100% of GDP, levels not seen since World War II, said Allan Sinai, chief economist at Decision Economics. That would put the U.S. in the same league as Italy, whose debt equals 104% of GDP.

Yet, why would officials elected to serve the common good worry about their harmful bankrupting of the nation when they can saturate their friends and donors with federal fat? You may decide for yourself if this is what you consider an appropriate use of $900,000,000,000.00 in public funds: “From Yachts to Textiles, Perks for Special Interests” and “Stimulus Bill Near $900 Billion.”

As I wrote in my “Redistributionism” post, liberal economic policy saves us from this sort of corruption. When people limit their government to narrow and defined areas of action, then there are less opportunities for self-serving folks to manipulate the power of the commonwealth for personal gain. A lean government is a more honest government. When the state interferes in everything, then clever fellows with criminal passions see public office and relations with those in public office as paths to riches and advantages. Consider the growth of the federal government since the New Deal, and note the similar increase in the power and activity of K Street lobbyists. Only a fool would wonder about the continuous expansion of wealthy residential developments around the Beltway.

Do you really want to know what is in this grab bag? Consider the nausea-inducing Journal article, “A 40-Year Wish List”:

“Never let a serious crisis go to waste. What I mean by that is it’s an opportunity to do things you couldn’t do before.”

So said White House Chief of Staff Rahm Emanuel in November, and Democrats in Congress are certainly taking his advice to heart. The 647-page, $825 billion House legislation is being sold as an economic “stimulus,” but now that Democrats have finally released the details we understand Rahm’s point much better. This is a political wonder that manages to spend money on just about every pent-up Democratic proposal of the last 40 years.

We’ve looked it over, and even we can’t quite believe it. There’s $1 billion for Amtrak, the federal railroad that hasn’t turned a profit in 40 years; $2 billion for child-care subsidies; $50 million for that great engine of job creation, the National Endowment for the Arts; $400 million for global-warming research and another $2.4 billion for carbon-capture demonstration projects. There’s even $650 million on top of the billions already doled out to pay for digital TV conversion coupons.

In selling the plan, President Obama has said this bill will make “dramatic investments to revive our flagging economy.” Well, you be the judge. Some $30 billion, or less than 5% of the spending in the bill, is for fixing bridges or other highway projects. There’s another $40 billion for broadband and electric grid development, airports and clean water projects that are arguably worthwhile priorities.

Add the roughly $20 billion for business tax cuts, and by our estimate only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus. And even many of these projects aren’t likely to help the economy immediately. As Peter Orszag, the President’s new budget director, told Congress a year ago, “even those [public works] that are ‘on the shelf’ generally cannot be undertaken quickly enough to provide timely stimulus to the economy.”

Most of the rest of this project spending will go to such things as renewable energy funding ($8 billion) or mass transit ($6 billion) that have a low or negative return on investment. Most urban transit systems are so badly managed that their fares cover less than half of their costs. However, the people who operate these systems belong to public-employee unions that are campaign contributors to . . . guess which party?

Here’s another lu-lu: Congress wants to spend $600 million more for the federal government to buy new cars. Uncle Sam already spends $3 billion a year on its fleet of 600,000 vehicles. Congress also wants to spend $7 billion for modernizing federal buildings and facilities. The Smithsonian is targeted to receive $150 million; we love the Smithsonian, too, but this is a job creator?

Another “stimulus” secret is that some $252 billion is for income-transfer payments—that is, not investments that arguably help everyone, but cash or benefits to individuals for doing nothing at all. There’s $81 billion for Medicaid, $36 billion for expanded unemployment benefits, $20 billion for food stamps, and $83 billion for the earned income credit for people who don’t pay income tax. While some of that may be justified to help poorer Americans ride out the recession, they aren’t job creators.

As for the promise of accountability, some $54 billion will go to federal programs that the Office of Management and Budget or the Government Accountability Office have already criticized as “ineffective” or unable to pass basic financial audits. These include the Economic Development Administration, the Small Business Administration, the 10 federal job training programs, and many more.

Oh, and don’t forget education, which would get $66 billion more. That’s more than the entire Education Department spent a mere 10 years ago and is on top of the doubling under President Bush. Some $6 billion of this will subsidize university building projects. If you think the intention here is to help kids learn, the House declares on page 257 that “No recipient . . . shall use such funds to provide financial assistance to students to attend private elementary or secondary schools.” Horrors: Some money might go to nonunion teachers.

The larger fiscal issue here is whether this spending bonanza will become part of the annual “budget baseline” that Congress uses as the new floor when calculating how much to increase spending the following year, and into the future. Democrats insist that it will not. But it’s hard—no, impossible—to believe that Congress will cut spending next year on any of these programs from their new, higher levels. The likelihood is that this allegedly emergency spending will become a permanent addition to federal outlays—increasing pressure for tax increases in the bargain. Any Blue Dog Democrat who votes for this ought to turn in his “deficit hawk” credentials.

This is supposed to be a new era of bipartisanship, but this bill was written based on the wish list of every living—or dead—Democratic interest group. As Speaker Nancy Pelosi put it, “We won the election. We wrote the bill.” So they did. Republicans should let them take all of the credit.

I do not find it shocking that Democrats have brazenly turned the stimulus bill into an orgy of socialist wastefulness. They have been buying the votes of the poor, government employees, and labor unions for decades with tax money from the other half of the nation. It would be less objectionable if our Populares would finance their own political ambitions. However, it is the tradition of demagogues to rob their cultural and class enemies to make them pay for their own destruction. The Chi-Coms charge the families of dissidents for their execution; our kinder, gentler Left finances the less painful and more gradual demographic and cultural extermination of their counter-revolutionaries.

I am not only blaming the Democrats’ for this hiddeous bill. Though perhaps well-intended, George W. Bush paved the way for this sort of irresponsibility with his administration’s attempt to stablize the credit market. Even with the nation caught up in messianic hysteria, I doubt that Obama could have been so ambitious without having had a Republican precedent. Moreover, the Republican majority that controlled Congress until A.D. 2006 was fiscally irresponsible. Their bad behavior provides the Democrats with a claim for impunity.

So, what should be done? No one knows, but we do have some historical precedents to guide us. Lowering taxes and easing the burdens on commerce that benefit no one but paper-pushing lawyers would likely do far more than the current carte blanche to the socialist Left. Alan Reynolds examines the futility and wastefulness of the bill and contrasts it to more promising policies in ”$646,214 Per Government Job”:

House Democrats propose to spend $550 billion of their two-year, $825 billion “stimulus bill” (the rest of it being tax cuts). Most of the spending is unlikely to be timely or temporary. Strangely, most of it is targeted toward sectors of the economy where unemployment is the lowest.

The December unemployment rate was only 2.3% for government workers and 3.8% in education and health. Unemployment rates in manufacturing and construction, by contrast, were 8.3% and 15.2% respectively. Yet 39% of the $550 billion in the bill would go to state and local governments. Another 17.3% would go to health and education—sectors where relatively secure government jobs are also prevalent.

If the intent of the plan is to alleviate unemployment, why spend over half of the money on sectors where unemployment is lowest? Another 22.5% of the $550 billion would go to social programs, such as expanding food stamps and extending benefits for the unemployed and subsidizing their health insurance.

After subtracting what House Democrats hope to spend on government payrolls, health, education and welfare, only a fifth of the original $550 billion is left for notoriously slow infrastructure projects, such as rebuilding highways and the electricity grid.

The Obama administration claims the stimulus bill will “create or save three or four million jobs over the next two years . . . with over 90% [of those jobs] in the private sector.” To prove it, they issued a report from Christina Romer, chairman of the Council of Economic Advisers, and Jared Bernstein, chief economic adviser to Vice President Joe Biden. Its key estimates, however, were simply lifted from an outdated paper by Mark Zandi of Moody’s economy.com.

Mr. Zandi’s current estimates have government employment growing by 330,400 over two years as a result of the House bill (compared with 244,000 in Bernstein-Romer paper). Yet even that updated figure still amounts to only 8.3% of total jobs added, even though state and local governments are to receive 39% of the funds ($214.5 billion). Spending $214.5 billion to create or save 330,400 government jobs implies that taxpayers are being asked to spend $646,214 per job.

Does that make sense?

Simulations with his macroeconomic model, according to Mr. Zandi, reveal that “every dollar spent on unemployment benefits generates an estimated $1.63 in near-term GDP.” By contrast, such “multipliers” simulate that tax cuts for business or investors would add only 30-38 cents on the dollar.

But econometric models are parables, not facts. The big multipliers for transfer payments and tiny multipliers for capital taxes in Mr. Zandi’s model reveal more about the way the model was constructed than about the way the economy works. If model builders make Keynesian assumptions, their model will generate Keynesian results. Yet as Harvard economist Robert Barro recently pointed out on this page, contemporary academic economic research does not support the multipliers used to justify the House stimulus bill.

In the March 2006 IMF Research Bulletin, economist Giovanni Ganelli summarized recent International Monetary Fund research on fiscal policy. Several studies find that reductions in government spending “can have expansionary effects, since they can contribute to a consumption and investment boom owing to altered expectations regarding future taxation.”

A 2002 study of U.S. data by Roberto Perotti of Università Bocconi did find that the effect of debt-financed spending increases was somewhat positive, but the multiplier effect was much less than one. A 2004 IMF study of recessions in advanced economies likewise found that “multipliers are unlikely to exceed unity.” A 2006 study of U.S. data by IMF economist Magda Kandil found the effect of “fiscal expansion appears insignificant on aggregate demand and economic activity.”

In December 2008, the National Bureau of Economic Research published “What are the Effects of Fiscal Policy Shocks?” by Andrew Mountford of the University of London and Harald Uhlig of the University of Chicago. “The best fiscal policy to stimulate the economy,” they report, “is a deficit-financed tax cut,” and “the long term costs of fiscal expansion through government spending are probably greater than the short term gains.”

That’s because “government spending shocks crowd out both residential and non-residential investment,” while “the [positive] response of consumption is small and only significantly different from zero on impact” (i.e., temporarily). But suppose all of these recent studies were mistaken, and the House Democrats’ spending spree worked as advertised. We’re still left with three million jobs added or saved at a cost of $825 billion—$275,000 per job.

In short, a growing body of evidence suggests that a dollar of extra spending is likely to lift nominal income by less than a dollar, arguably much less. Several studies suggest the multiplier may be less than zero after a couple of years, because private investment (including housing) eventually falls by more than government spending rises. Another $550 billion of deficit spending on top of a deficit already above $1 trillion is likely to prove more dangerous than helpful to an economy already overloaded with risky debt.

We have lived too long shielded from the consequences of our stupidity. I find it odd that wealth makes many people oblivious to the necessary conditions of continuous prosperity. As a civilization, the well fed and well rested West has squandered its ascendency. Maybe penury will re-instruct our people what we must do to survive in the hostile state of nature.

Posted by Joseph on Saturday, January 31, Anno Domini 2009
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