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Peter Crabb: Why stop at $819 billion? Why not 100 percent of the nation's output?

They are looking for more than a trillion bangs for their bucks.

The U.S. House or Representatives has voted 244-188 in favor of H.R.1, the American Recovery and Reinvestment Act of 2009. That’s the short title of this law.

The full name of the bill reads “Making supplemental appropriations for job preservation and creation, infrastructure investment, energy efficiency and science, assistance to the unemployed, and State and local fiscal stabilization, for the fiscal year ending September 30, 2009, and for other purposes.”

As the vote on this potentially new law moves to the U.S. Senate, $819 billion worth of ‘supplemental appropriations’ are listed among its 647 pages. The Senate is expected to add more. These appropriations amount to 5.7 percent of the U.S. annual output — clearly, a historically massive undertaking by the federal government in an effort to stimulate economic activity.

Will 5.7 percent in government spending lead to an “American Recovery”? Any event or policy that raises government purchases or lowers taxes increases aggregate demand in the economy. But are purchases simply replacing private purchases or investments?

Those who advocate such government action are relying on the multiplier effect – a theory that what the government spends is spent again, thereby amplifying the effects of any policy change on aggregate demand. Furthermore, if the government does not respond in times like these, the results are very undesirable, and they claim unnecessary, fluctuations in output and employment. This school of thought has many supporters. In fact, some say the current action is too little. Writing in The Wall Street Journal this week, Robert Shiller of Yale University looks at this bill as too small. He argues greater government spending is needed to reignite the “animal spirits” investors.

In his column for The New York Times, Nobel Prize economist Paul Krugman agrees that more spending is necessary if there is to be any noticeable effect on economic activity.

Critics of such active government stimulus for the economy point to lags and the crowding-out effect. This latter theory shows that government spending is ineffective because the resulting increase in government debt raises interest rates; thereby reducing private investment in the economy (“Reinvestment” was probably included in the title of the bill to counter this argument).

Last week, Harvard economist Robert Barro argued in a piece for The Wall Street Journal that there is no multiplier effect. Using historical evidence from the United States he estimates the multiplier is 0.8 – implying that for every dollar of government spending, 20 cents is lost.

In an interview for the New York Times, fellow Harvard economist Jeffrey Frankel pointed out that previous big fiscal policy actions of this magnitude, such as the Kennedy tax cuts in the 1960s, did not come into effect until well after the recession was over.

Sen. Mike Crapo, along with other Republican senators, met with president Obama on Tuesday regarding the economic stimulus package. His thoughts: The “proposal costs too much, and will be too much of a burden on our children and their future generations.”

Crapo is absolutely right that this must be paid for. We cannot possibly believe that government can simply spend its way to prosperity.

The multiplier effect advocates must believe that government can get a free lunch. The federal government can get more than it pays for. If so, why stop at only 5.7 percent of our economy? Why not 50 or 100 percent?

One thing we can rest assured of: The massive number of dollars in this bill will not go to allegedly corrupt politicians. According to page 14 of the bill, “None of the funds provided by this Act may be made available to the State of Illinois . unless Rod R. Blagojevich no longer holds the office of Governor of the State”.

Since 2000, Peter R. Crabb has been a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon

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