Economic Stimulus

I really hate to say "I told you so" but I told you so. My March 2008 article in the Knoxville News-Sentinel stated that the then proposed economic stimulus package proposed by President Bush would have little impact on the economy. True to their type, the politicians led by President-elect Obama are pushing for a new economic stimulus package. Again, it will do little good but at least it gives the impression that the politicians are doing something. However, it will do harm in that it adds to the already oppressive burden of growing Federal debt. But more on that later. For now, here is the News-Sentinel piece from March 3, 2008.

The economic stimulus package has been enacted adding further evidence that our national politicians have crossed over to the dark side. The package is supposed to keep the country out of a recession. The question is will it work? The answer is no. First and foremost, no package of transitory and temporary measures has ever been effective in stimulating economic growth. Even the politicians know this. Historically the only stimulus measures that have had a lasting impact have been those that are more permanent such as decreasing marginal tax rates and cutting the corporate income tax. Recent research shows that if the Bush tax cuts were made permanent, $76 billion would be added to GDP creating 709,000 jobs. That these measures were not considered shows that Congress wants a thankful electorate with their hands out rather than seriously addressing our economic ills.

It is interesting that our Tennessee politicians in Washington covered the spectrum of choices. One of our senators embraced the package and the expansion by the senate to include seniors on social security and disabled veterans while the other rightly referred to it as a political not economic stimulus package. One of our representatives walked deftly down the middle of the road, voting for the package and then co-sponsoring a bill to reduce the corporate tax rate by 10 percent.

Yet make no mistake about it, this bill would have never been enacted if this were not an election year. First, the size of the package is $168 billion which amounts to about 1 ½ percent of GDP. I have yet to hear how such a small injection is enough to keep the economy out of a recession. Second, a large part of the package is in the form of checks sent to households earning less than $150,000. Research on the impact of a similar tax rebate as part of the 2001 stimulus package shows that the rebates were mostly saved or used to reduce debt burdens rather than spent. Given the impact on consumer’s balance sheets of the recent fall in home values and increasing debt burdens, consumers are not likely to use the money to increase spending. Third, the 2001 stimulus package was enacted with the government running a budgetary surplus. That is not the case today.

Therefore, one thing is certain, there will be a negative long term impact – an further increase in the deficit. This is because the government can raise the money for the package by either borrowing it, increasing taxes or by printing it. All are bad. As pointed out by our senator Bob Corker, it will all be borrowed with a cumulative effect of growing the deficit by over $700 billion in two generations. In effect, our grandchildren will pay for the folly of this Congress.