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Monday, January 26, 2009

Stimulus Chicanery: Democrats Suppress The Truth About The Stimulus Package

The current economic stimulus plan being considered by Congressional Democrats was brought under fire last week by the Congressional Budget Office, or CBO. This week, the CBO (even though it is controlled by Democrats) has been brought under fire by the Democrats. Apparently, Congressional leaders were hard pressed to explain how monies that weren't to be spent until 2011 would help the economy "now."

From the Wall Street Journal Op-Ed:

According to Congressional Budget Office estimates, a mere $26 billion of the House stimulus bill's $355 billion in new spending would actually be spent in the current fiscal year, and just $110 billion would be spent by the end of 2010. This is highly embarrassing given that Congress's justification for passing this bill so urgently is to help the economy right now, if not sooner.

And the red Congressional faces must be very red indeed, because CBO's analysis has since vanished into thin air after having been posted early last week on the Appropriations Committee Web site.


Interesting that as soon as the truths uncovered by this report were published and re-broadcast by certain media, the Democrats shut it down. They didn't want the truth to come out. But what is that truth?

Read on:

The problem is that the money for this spending boom has to come from somewhere, which means it is removed from the private sector as higher taxes or borrowing. For every $1 the government "injects," it must take $1 away from someone else -- either in taxes or by issuing a bond. In either case this leaves $1 less available for private investment or consumption. Mr. Barro wrote about this way back in 1974 in his classic article, "Are Government Bonds Net Wealth?", in the Journal of Political Economy. Larry Summers and Paul Krugman must have missed it.


And taking money away from the private sector means no economic growth. Taking too much money away from the private sector means a shrinking economy.

More:

A similar analysis applies to the tax cuts that are part of President Obama's proposal. In contrast to the spending, at least the tax cuts will take effect immediately. But the problem is that Mr. Obama wants them to be temporary, which means taxpayers realize they will see no permanent increase in their after-tax incomes. Not being fools, Americans may either save or spend the money but they aren't likely to change their behavior in ways that will spur growth. For Exhibit A, consider the failure of last February's tax rebate stimulus, which was a bipartisan production of George W. Bush and Mr. Summers, who is now advising Mr. Obama.

To be genuinely stimulating, tax cuts need to be immediate, permanent and on the "margin," meaning that they apply to the next dollar of income that an individual or business earns. This was the principle behind the Kennedy tax cuts of 1964, as well as the Reagan tax cuts of 1981, which finally took full effect on January 1, 1983.


We can point to many examples throughout history where tax cuts allowed for an expansion of the economy. Tax increases lead at best to stagnation, or at worst, depression.

What would tax cuts do for an economic stimulus? This:

The revenue cost of eliminating the corporate tax wouldn't be any more than their proposed $355 billion in new spending, and we guarantee its "multiplier" effects on growth would be far greater. Research by Mr. Obama's own White House chief economist, Christina Romer, has shown that every $1 in tax cuts can increase output by as much as $3.


So why not go with tax cuts to stimulate the economy?

The spending portion of the stimulus, in short, isn't really about the economy. It's about promoting long-time Democratic policy goals, such as subsidizing health care for the middle class and promoting alternative energy. The "stimulus" is merely the mother of all political excuses to pack as much of this spending agenda as possible into a single bill when Mr. Obama is at his political zenith.

Apart from the inevitable waste, the Democrats are taking a big political gamble here. Congress and Mr. Obama are promoting this stimulus as the key to economic revival. Americans who know nothing about multipliers or neo-Keynesians expect it to work. The Federal Reserve is pushing trillions of dollars of monetary stimulus into the economy, and perhaps that along with a better bank rescue strategy will make the difference. But if spring and then summer arrive, and the economy is still in recession, Americans are going to start asking what they bought for that $355 billion.


The Democrats have decreed that the CBO re-work the numbers and make them more palatable to the American people. But the original report was based on more honesty than the re-worked report would be.

It amounts to nothing more than political chicanery that our grandchildren and great-grandchildren will end up paying for.

Welcome to George Orwell's 1984.

You can access the complete column on-line here:

The Stimulus Time Machine
Wall Street Journal
January 26, 2009

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