More Stimulus May Not Be Worth It
In my last post I made a brief comparison of the TARP and a stimulus package. My principal point was that most TARP activities by the government represent investments that can be sold later under better circumstances and may even turn a profit for taxpayers. Another stimulus package, on the other hand, will involve traditional government spending where a dollar spent is a dollar gone, even if it does some good along with way.
Another distinction is that TARP is designed to prevent a collapse of our financial system of massive proportions that would have severe implications for the real economy. A stimulus plan, on the other hand, has lower stakes, and its long-run cost could more easily outweigh the short-term benefits.
Here I want to make two additional points that contribute to a lower priority for a massive stimulus package. The first point is that if the government did nothing new by way of stimulus, built-in automatic stabilizers will do much of the work on their own. As economic activity declines, it automatically triggers certain social welfare programs, or increases in those programs, as well as reducing tax revenue. Fiscal stimulus will be automatic, and has already started.
The federal budget deficit for fiscal year 2008, ended last September, was a postwar record of $455 billion, or 3.2 percent of GDP. Even with no new stimulus package, the Congressional Budget Office projects a deficit of $1.2 trillion in the current fiscal year. Let me repeat: that is TRILLION and WITHOUT a new stimulus package. Doing nothing-or nothing new-might be a good option to consider, especially if no one has any good ideas about what new thing could be done that would help very much.
The second point that reduces the relative need for a massive stimulus package is that it's hard to target them where they are needed most. Early indications are that the proposed stimulus plan will not be an innovated new well-targeted approach to deal with specific new problems, but a grab bag of old bromides subject to their familiar shortcomings.
A graphic, but somewhat less than fair, way of describing one of the main facilities of fiscal stimulus is the bathtub analogy. It's like taking water from one end of the tub and pouring it into the other end expecting the water level to rise. If you are already in a deficit position-which we are in spades-it's borrowing money from one group of people (with a promise to pay it back with interest) to spend to help another group of people. Calling it a zero-sum game, would be close, but not completely accurate, since we may presume that the lenders to the government are somewhat less likely to spend the money than the recipients-hardly a resounding endorsement of borrowing from Peter to pay Paul.
That is a here-and-now problem. The case becomes even weaker when you let enough time pass to include the effect of taxing Paul (or Paul's cousin) to pay interest on the debt created. Deficit spending is borrowing from the future to benefit the present.
These important considerations still don't deal with the devil in the details. For example, one suggestion is a windfall profits tax (say on energy companies) to raise money to give to or spend on "regular folks." That little jewel was probably formulated before the collapse of energy prices. But, even if it hadn't been, don't we need profits in the energy sector to finance the finding and development of new and old sources of energy. At 35 percent, the U.S. corporate tax rate is already the second highest in the world behind Japan, which is also suffering an economic downturn.
Another devil in the details involve spending more borrowed money on pet projects without considering that most of that new spending and employment will be at the expense of existing spending and employment. For example, will spending borrowed money to weatherize low-income homes or make them more energy efficient utilize newly unemployed workers in that industry? Or, will the work go to existing on-going firms?
Will $10 billion for science facilities and research mean the employment of out-of-work scientists or might it lead to shifts of employed scientists? How many out of work scientists do we have, anyway? And how good will unemployed financial services workers be at "infrastructure" work?
Will the nearly $142 billion allocated for school repairs and school safety serve a priority need? Are repairs the highest need in our school systems? I'm not sure what public safety in our schools means. If it means more police officers to keep order and protect the students from the thugs, I might be for that one.
I'm glad to see a few tax cuts thrown into the mix, but what kind of cuts are they? Do they increase incentives to produce and earn more, or are they given out to reward breathing. I understand that a tax credit of $500 per person, or $1000 per family, will be given to "make work pay," unless, of course, work is already paying well. Wouldn't that money be better spent as a reduction in the marginal income tax rate to enhance lasting incentives? And, if need for a tax cut is evident, why not announce no new tax increases instead. Keeping marginal tax rates where they are, including the current rates on capital gains and dividends, plus some relief on the corporate tax rate, would be one heck of a stimulus program. The bonus would be a rebound in the stock market both large and immediate. Then the stock market could spread hope rather than continued doom and gloom.
In another post, I made the case that a reduction of taxes on capital is a good way to increase the income of labor. Yes, really. Go here.