Category Archives: Stimulus

Federal spending is going up. Tax receipts are going down. 2009’s federal budget deficit is now up to $1.27 trillion as a result. That’s about triple what even big-spending George W. Bush could manage. Total federal debt now stands at over $11.66 trillion.

Many other developed countries have built debt loads twice ours and more, and without apocalyptic consequences. So it appears such enormous shortfalls do not pose an existential threat to the economy. At least, not yet. But high long-run deficits do slow growth. To help end the recession, government should reduce the deficit by spending less. Three reasons why:

–Today’s deficit is tomorrow’s tax increase. Deficits are paid for by borrowing. What the government borrows, it has to pay back. Sometimes it puts off that taxation by borrowing money to pay back previously borrowed money. But some day, borrowed money ultimately has to paid back by taxpayers. Increasing deficits necessarily means increasing future taxes.

–Government borrowing crowds out private borrowing. The higher the deficit, the more crowding out. This point is underappreciated. There are only so many investor dollars to go around. The $1.27 trillion the government is borrowing to pay for this year’s spending is $1.27 trillion that now cannot go towards job-creating corporate bond issues or stock IPOs. Imagine the opportunity costs.

–More spending begets more regulation. Government money comes with strings attached, as GM now knows. And once a rule is in the books, it’s in there for good, usually. When government spends so fast that it has to borrow, the process accelerates.

The budget deficit is expected to rise even higher as 2009 runs its course. There are already 1,270,000,000,000 trillion reasons for government to cut spending to levels it can afford. How many more do Congress and the president need?

CEI is putting out a series of short videos called “Policy Translated.” Our policy wonks hold forth on an issue, and snarky subtitles translate what we’re saying into English. You can check out the channel here. Below is my contribution, where I explain why fiscal stimulus doesn’t work very well.

In case the embedded video doesn’t work, you can watch it by clicking here.

$1,562,568 of stimulus money went to subsidize mozzarella cheese in Rep. Marcia Fudge’s district.

There has been some chatter recently that the economy needs another stimulus package. The Brookings Institution’s Martin N. Baily cautions against one — unless growth remains sharply negative through the end of the year. Then he’d like to see a stimulus in the form of tax rebate checks, such as President George W. Bush issued twice during his presidency.

One problem: any stimulus proposal is, by its very nature, less than a zero-sum proposition. Stimulus involves taking some money out of the economy, wasting some of it on bureaucracy, then putting it back in.

Rebate check-style stimulus is less harmful than the pork-laden American Recovery and Reinvestment Act. But the same logic still applies. There are transaction costs to sending out millions of checks.

And if the rebate increases the budget deficit, then tomorrow’s taxes will have to be raised to pay off today’s rebate.

Worse, one-time stimulus checks don’t change peoples’ spending behavior very much. This is because of what economists call the Permanent Income Hypothesis; people base their spending behavior on their expected long-term income, not on short-term windfalls. People tend to save their checks instead of spend them.

If you’re wondering why no stimulus package has ever had much discernible effect, those would be the reasons why.

Instead, I would urge a deregulatory stimulus.

The logic behind the Bush-Obama stimulus runs like this: if people aren’t spending enough money to keep the economy afloat, then government should increase its spending to make up the difference. It’s conventional Keynesian theory.

Surprising, then, that President Obama asked federal departments to find $100 million dollars in cuts.

Does that mean that a $787 billion stimulus package is too much, but $786.9 billion is just right?