The Magazine

The Right Stimulus

Republicans need to propose one since Congressional Democrats haven't.

Feb 9, 2009, Vol. 14, No. 19 • By MATTHEW CONTINETTI
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The economy is in recession. There's no end in sight. The number of unemployed continues to rise. Equities markets are in the dumps. The real estate sector hasn't hit bottom. The banks are drowning in a sludge of toxic assets. Excuse us while we break out the Prozac.

Washington's response? Pathetic. House Speaker Nancy Pelosi let her appropriators out of their cages and had them draft the American Recovery and Reinvestment Act of 2009. This is the economic stimulus package that everyone has been waiting for. And it's a clunker. The more you learn about the economic stimulus plan, the less you like it. Charles Krauthammer called it the "worst bill in galactic history." This is only a slight exaggeration.

What the Democrats have done is write down every single item on their liberal wish list, append dollar amounts next to the items seemingly at random, and call it "stimulus." The president wanted the bill to be free of pet projects and include business tax cuts. But no one told Pelosi's appopriators. They are using the current troubles to push through a decades-old domestic policy agenda. The spending--$50 million for the National Endowment for the Arts, $400 million for global warming studies--demonstrates that the bill has no overarching logic.

Which makes it a major disappointment. Almost everybody agrees that the economy is a mess and that fiscal policy might help tidy things up. But $6.2 billion for "home weatherization"?

The problem with the House plan is that it is ineffective even on Keynesian grounds. Keynes said that, once monetary policy has reached its limit, fiscal policy must take priority. In other words, when interest rates have effectively reached zero, governments must lower taxes and increase spending to rebalance the economy. But the House bill is half-baked Keynes. And it will fail.

It will fail because it is imperfectly designed. A well-designed stimulus meets three criteria. It's large. It's fast. You like what you get out of it. But the Democratic plan is none of these. When you look closely at the House bill, you realize that it's not so big after all. Nor will the money be spent quickly. And the things we get out of it? Small fry.

The Congressional Budget Office projects that the House bill will cost $816 billion. Of that, $248 billion is in aid to states for Medicare and Medicaid, unemployment insurance, and so on. Another $212 billion is in tax cuts. This leaves $356 billion in discretionary spending.

It's hard to argue that the $248 billion in transfers to the states will stimulate the economy. The money is being taken from one pot and put in another so that the states can balance their books and ensure the proper treatment of beneficiaries. It doesn't prime the pump. It just keeps the pump from falling apart.

Then there are the tax cuts. The bulk of them go to the "Making Work Pay" refundable payroll tax credit of $500 per worker. It's unclear whether the credit will be reflected immediately in your paycheck. The government may send out checks as it did in 2001 and 2008. But a change in withholding would be preferable. It wouldn't take long to implement. The taxpayers would have the money quickly. Voilà! An instant raise.

Except that the raise will be peanuts. You'll hardly notice it. If you do, experience suggests that you probably won't spend it. Washington has cut taxes in this manner twice in the last decade. Both times, taxpayers saved the money or used it to pay down personal debt. There was hardly any stimulating effect. The refund doesn't seem to have worked then. Why would another work now?

That leaves the roughly $356 billion in discretionary spending. But not all of it will be spent quickly. The CBO estimates that only $29 billion will be spent by the end of fiscal year 2009. About $116 billion will be spent in fiscal year 2010. This gives us a total of $145 billion in infrastructure and other spending over the next fiscal year and a half. Too little, too late. And therefore unlikely to have much of an impact.

Republicans, then, had every reason to vote against the stimulus bill. And so they did. Unanimously. But that doesn't mean their alternative is much better. The House GOP plan calls for a cut in marginal tax rates, making permanent the Bush capital gains tax cuts, and lowering the corporate tax rate. But marginal tax rates are already low. Cutting them further isn't likely to have a major impact.

Still, the moment is ripe for the right stimulus. There's a market for a thoughtful alternative to the Pelosi-Obama bill. The Democrats want Americans to use deficit spending to reshape society along liberal lines. A Republican stimulus should promote conservative goals.