Lawmakers who are negotiating a final compromise in Washington, D.C., on the economic stimulus package tentatively agreed Wednesday on a $790 billion price tag. The Idaho Statesman invited two professors of economics and finance at Northwest Nazarene University in Nampa to debate the pros and cons of the stimulus.
This week David Axelrod, adviser to President Obama, said, "The American people are desperate for us to act." So the U.S. Senate passed its legislation this week, and the compromise bill with the House is likely to come in around $800 billion. We are not that desperate!
First, the U.S. government already can't afford it. Federal tax revenue declined nearly 10 percent in the first four months of the fiscal year. The federal government's fiscal year is Oct. 1 through Sept. 30. So far Washington is down over $88 billion in tax revenue compared with last year as corporate tax receipts and tax withholding from paychecks both fall with lower profits and fewer jobs or year-end bonuses.
The Congressional Budget Office estimates the federal deficit over the four-month period that ended in January will be $563 billion. This is $474 billion higher than the deficit over the same period last year. Any potential impact of the economic stimulus plan will be directly offset by this deficit increase.
Further offsets include the necessary debt to fund spending plans. Interest rates on bonds began rising rapidly this week as more government debt comes to market. At the same time, state and local governments are cutting spending. These reductions in economic activity will further neutralize a large part of the stimulus from Washington.
Second, even if not offset by cuts elsewhere, the immediate impact is very small. Government spending to build new homes or new highways with unemployed labor can have a big impact. However, new homes have little chance for sale given the current glut, and new highways go unused unless businesses expand to where the roads lead. These "shovel-ready" projects have no immediate impact as they do not induce commerce.
Third, the actual stimulus in the plan depends entirely on consumers' desire to spend. Today, that desire is dramatically diminished. The personal savings rate in the U.S. has jumped from nearly zero to almost 4 percent.
For evidence of how little is likely to be spent from the government handout, we need look only to the economic stimulus of 2008, which gave a tax credit to millions of U.S. households. Once all those checks were written, personal consumption expenditures were down over 8 percent in the last half of 2008.
According to President Obama's advisers, the stimulus plan will create or save about 3.6 million jobs by the end of 2010. Christina Romer and Jared Bernstein, economists in the Obama administration, say passage of a stimulus bill will result in an unemployment rate of 7 percent in 2010, versus 8.8 percent otherwise.
Are we so "desperate" that we must spend nearly $139,000 for each job saved?
I wish I made that much.
Reach Peter R. Crabb, Ph.D., at firstname.lastname@example.org.