Why the Stimulus Failed www.Heritage.org
The Democratic Party was shaken to its core on Tuesday when Sen. Chris Dodd (D-CT), Sen. Byron Dorgan (D-ND) and Gov. Bill Ritter (D-CO) announced they would not run for re-election in 2010, all on the same day. The source of these Democrats’ fears in facing the American people at the polls is no secret: the American people believe the state of the economy is poor and getting worse. Responding to this dismal environment, Sen. Ben Nelson (D-NE) told the Fremont Tribune on Tuesday: “I think it was a mistake to take health care on as opposed to continuing to spend the time on the economy.” While we agree with Nelson that President Barack Obama’s health care priorities have been grossly misplaced, we shudder to think what more “time on the economy” would have meant from this White House.
Just last month in a speech to The Brookings Institution, President Obama outlined his proposal for a third round of stimulus funding on top of the $787 billion stimulus he signed into law last February. Third stimulus you say? Yes, third stimulus. Any fair accounting of government deficit spending in response to this recession must also include President George Bush’s failed 2008 $168 billion economic stimulus bill. Why did these first two economic stimuli fail? For the same reason any third stimulus will also fail: government spending does not inject any new money into the economy. Heritage Foundation Senior Policy Analyst Brian Riedl explains:
Congress does not have a vault of money waiting to be distributed. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.…
Yes, government spending can put under-utilized factories and individuals to work–but only by idling other resources in whatever part of the economy supplied the funds. If adding $1 billion would create 40,000 jobs in one depressed part of the economy, then losing $1 billion will cost roughly the same number of jobs in whatever part of the economy supplied Washington with the funds. It is a zero-sum transfer regardless of whether the unemployment rate is 5 percent or 50 percent.
The fact that the money for government spending does not just fall from the sky is no secret. As Senior Research Fellow Ronald Utt has detailed, multiple government entities acknowledge this fact, including the General Accountability Office and the Congressional Research Service, who concluded:
To the extent that financing new highways by reducing expenditures on other programs or by deficit finance and its impact on private consumption and investment, the net impact on the economy of highway construction in terms of both output and employment could be nullified or even negative.
Like government spending, the wrong kind of tax cuts can also be worthless in spurring economic growth. Riedl explains:
Many tax cutters commit the same fallacy as do government spenders when asserting that tax cuts spur economic growth by “putting spending money in people’s pockets.” Similar to government spending, the tax-cut cash does not fall from the sky. It comes from reduced investment and a higher trade deficit (if financed by budget deficits) or from government spending (if offset by spending cuts).
Permanent cuts to marginal to high marginal tax rates can encourage more business investment and economic growth. But Bush’s 2008 tax cuts and Obama’s 2009 tax cuts were both just tax rebates which, especially when they are given to people with no tax liability to begin with, are economically indistinguishable from government spending.
The economy’s own self-correcting mechanisms have already begun to move the economy out of recession. Now is no time to stall the recovery before it gets going with another round of deficit spending on top of our existing $1.4 trillion deficit.
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QUICK HITS
- After seven Senators sent a letter to the White House demanding to know what the Obama administration knew about Transportation Security Administration nominee Erroll Southers’ misleading statements to Congress about his improper personal use of FBI databases (and when they knew it), the White House admitted they did not know about Southers’ misstatements until this November.
- Democrat Mayor Sheila Dixon of Baltimore, who was convicted of embezzlement last month, said she will resign from office in early February.
- In his State of the State address on Wednesday night, California Gov. Arnold Schwarzenegger said the Senate health care bill was filled with “bribes, deals and loopholes” and added: “California’s congressional delegation should either vote against this bill that is a disaster for California or get in there and fight for the same sweetheart deal Senator Nelson of Nebraska got for the Cornhusker State. He got the corn; we got the husk.”
- For the second day in a row, White House spokesman Robert Gibbs continued to dodge questions about President Barack Obama’s broken promise to the American people to have health care negotiations on C-SPAN.
- New York City projects that the Obama administration’s decision to try Khalid Sheikh Mohammed and five other suspects in civilian court will cost them more than $400 million.
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