By William B. Conerly, Ph.D.
What’s wrong with a stimulus package? Most of us economists see the economy slowing, with roughly half of us forecasting a recession. Wouldn’t a little stimulus be in order?
The core of the President’s plan, agreed to by the House of Representatives, is simple: The United States Treasury borrows money, which these days is primarily from foreign investors or countries, and gives us the money, labeled “tax refunds.” Like most labels invented by politicians, this label is a little misleading. You don’t have to be an actual taxpayer to receive a tax refund.
The first problem with the stimulus plan is that the typical political response is dead wrong. “We have to do something” is what every candidate says. It’s hard to run on a platform of “The economy tends to recover naturally, so let’s not do anything at all.” Yet the truth is that the economy does rebound on its own, through market-driven changes in the inflation rate, interest rates and exchange rates.
The equilibrating mechanisms don’t work instantaneously, nor do they always work perfectly. To say that our economy is imperfect, however, is a straw man. The proposed stimulus packages, including the ones being proposed in the Senate, are far from perfect themselves.
John F. Kennedy campaigned for the presidency during the 1960 recession, arguing for tax cuts. His proposals were not enacted until 1964, after his death, and they helped the economy just as the Vietnam War was expanding and the Federal Reserve was rapidly increasing the money supply. Instead of adding stimulus during a recession, the Kennedy tax cuts added stimulus during a boom, which worsened inflation.
Stimulus plans often discourage the incentives that an economy needs for long-run health. Increasing unemployment insurance benefits, for instance, has been found to lengthen the average duration of unemployment, offsetting the desired stimulus from spending.
Pork barrel projects often find their way into stimulus packages. Talk of a stimulus package brings every lobbyist in Washington to the halls of the Capitol. The debate over which pet projects to incorporate slows down implementation of the stimulus package. The longer the package is debated, the higher the likelihood that the economy will be recovering when the stimulus takes effect.
A stimulus package will have a lot less impact than politicians proclaim. The President’s plan amounts to 1.25 percent of personal income. Compare that to Oregon’s kicker refund of a couple months ago, which was 0.85 percent of personal income, about two-thirds the size of the federal stimulus package, in relative terms. Does anyone feel that the Oregon economy has been jump-started? Oregon employment in December increased by only 900 jobs, seasonally adjusted, far less than the average monthly gain before the kicker. Our unemployment rate ticked up one tenth of one percent.
Why don’t a bunch of checks in the mail help the economy? Actually they do, but just to a small extent. Consumers who routinely spend 95 percent of their paycheck often will use a windfall to pay off credit card bills or add to savings. The bottom line is that the federal stimulus package will provide a small boost to the economy, which will last about three months, and then the stimulus is over. That boost may come when we need it, or well after we needed it, depending on how long Congress takes to reach a decision.
After the stimulus is over, we’re left with the debt. Remember that the United States Treasury does not have $146 billion lying around its vaults. Every dollar in the stimulus package will be borrowed. Every year the interest on that debt will accumulate, dragging down the economy and burdening our children, all for a small, temporary effect.
If the government really wants to stimulate the economy, there are things it can do, such as reducing tax rates and regulations on business. It’s too bad that the U.S. Congress either doesn’t understand these concepts or chooses to ignore them.
William B. Conerly, Ph.D. is Chairman of the Board of Cascade Policy Institute, principal of Conerly Consulting LLC and a member of the Governor’s Council of Economic Advisors.