Economic Stimulus

Possibly by the time you are reading this, the Senate will have voted on its version of an economic stimulus program, similar to but not identical with the $819 billion bill the House passed last Wednesday. As of Monday afternoon, February 2, the Senate's modifications looked to run the potential cost to $887 billion – give or take.

The nominal purpose of this enormous federal government outreach is to administer a jump-start to the still declining economy. The proposal looks to do this through some tax relief, construction-oriented spending projects and expansions of various benefit programs, especially unemployment insurance and Medicaid. At the same time, several of the specific measures represent major new extensions of government participation. While these latter might be desirable according to some political and policy agendas, we're skeptical of the rush to shove them into law without much of the usual analysis and vetting. To say nothing of all the money being thrown around.

Traditional Stimulus Provisions
The main tax item is a refundable tax credit that marks the initiation of the "tax cut for 95% of Americans" that Mr. Obama campaigned on. Estimates from the Congressional Budget Office suggest that this will infuse about $117 billion into people's take-home pay this fiscal year (ends September 30) and $250 billion in 2010 through reduced withholding.

Unemployment insurance has already been liberalized twice over the last year and is due in this plan for further lengthening of recipients' eligibility. Food stamps, now called the Supplemental Nutrition Assistance Program or "SNAP", would also get a boost.

Some months ago, we argued here for "revenue sharing" to give some generalized relief to state and local governments whose budgets are in really tough shape presently. Such undesignated grants are not in this plan, but extra support for Medicaid and "state fiscal relief" are included. These would limit spending cuts, layoffs and tax increases that would otherwise be needed for those governments to balance their budgets.

The bill contains some standard highway spending, public transit and other public works, some under the rubric of making federal government buildings and military installations more environmentally compliant.

All of these items have strong historical precedents as fiscal stabilizers. Some "talking-heads" have argued that the construction works are too slow to get under way, but the mere passage of the spending authorization sets off planning and preparation activity and raises expectations. The Senate's bill may also contain provisions to speed the usual contracting and approval processes to get these projects going sooner.

New Initiatives: In an Omnibus Package?
More controversial – at least in our view, and what we've heard from some other commentators – are moves instituting federal support of individuals' health insurance, collecting and computerizing health information, a major foray into education spending, including construction funding and more Pell Grants, and energy and environmental projects. These programs and others may be quite worthy and desirable to the new, more liberal majorities in government. These issues are part of the platforms those people ran for office to support. But we're surprised to see them packaged together under the banner of "economic stimulus". Indeed, any government outlay could be deemed economic stimulus, and apparently this is the rationale for the slapdash treatment of some of these items. But since they are new, it would seem appropriate to have hearings and discussions on standards, budgets and other aspects of the federal governing process. One agency, for instance, with a current budget of about $17 million, would be allotted something on the order of $1 billion. How should they manage these monies?

Tax Cuts or Spending Hikes?
Another concern about the stimulus package is the overall division between lowering taxes and raising spending. Tax relief is more easily implemented, at the least the kind in this plan, so it might help sooner, as soon as withholding schedules can be adjusted. But consumers might save some of the resulting increase in their paychecks, diluting the intended boost to their spending. Thus, the shape of this current stimulus package tilts more toward government doing the spending to get the money into the economy, albeit with some delay. Which is better?

The issue of larger consumer saving during recessions is called the "paradox of thrift", in which consumers make the recession worse by holding back their spending to try to shore up their own finances. This topic would be good for an entire article here or more. Briefly, though, in some recessions that had different origins, we might have some concern about the deleterious impact of consumers' "thrift". But this collapse emerged in part from spendthrift consumers who could no longer pay their bills. We want them to get their debt down. We argued here last spring for you to use last year's tax rebate check to do just that. It's much better to have less debt rather than more - especially if you lose your job. So right now, we'd say that the paradox of thrift is almost a red herring, if it's being used as a reason not to cut taxes.

Ways of the World cannot by definition advocate for specific government positions or policies. But we can alert you to questions you can ask and features you should be on the lookout for. Know where your dollars are going. And the $900 billion total doesn't include the extra interest cost due to the ballooning government debt. Indeed, interest rates on long-term government securities have already begun to rise in anticipation of the larger borrowing needs. At the same time, if these programs are effective in stimulating the economy, then revenues will increase, so the stimulus will be at least partially self-supporting. We hope that's how it turns out.