Thoughts On The Stimulus Package

by Dual Income No Kids on February 13, 2009 · 0 comments

Trade offs.

Like you I’ve been digesting the headlines over the economic stimulus package currently in congress. It looks like the bill will pass. While I’m not an expert, here are some thoughts. All in all it looks like the bill will provide some stimulus at the expense of long term fiscal health.

1) Government spending will help the economy by increasing aggregate spending and investment (1). The bill calls for 150 billion for public works projects, 67 billion for medicaid and 6.5 billion for medical research (1).

2) The law contains some beneficial changes to the tax code. There are income tax credits of $400 for individuals and $800 for couples. Also it addresses the Alternative Minimum Tax and gives a home ownership incentive by providing a $8,000 first time tax credit (1). All of these are sure to stimulate the economy.

3) Government must do something. While nobody can tell for sure what the impact of the bill will be, doing nothing while people lose their jobs is not an option. This bill is not perfect, but in light of the massive job cuts, using a combination of tax credits and spending is not a bad approach.

Despite these disadvantages, its clear the stimulus package has some serious long term trade offs.

A) Budget deficit pressure. The bill will be entirely based on borrowed money. All the tax cuts and spending will need to be paid for, and the Feds don’t have hundreds of billions on hand, so they’ve got to borrow it. Now, this additional borrowing comes on the heels over over nearly three decades of fiscal profligacy by the feds. According to some, the feds are $10 trillion in debt (1). On top of this congress is looking at adding nearly another trillion to the tab.

This is going to increase pressure to raise taxes. Its also going to increase the money supply which will ultimately result inflation once the economy picks up. Ironically, it will also put increasing pressure on borrowing. Bottom line, it will hobble any later attempts at good governance.

B) Growth of bureaucracy. Traditional conservative thinking is that as government increases, personal freedom is constrained, ultimately resulting in lower economic growth rates. One of the stated goals of this bill is to implement new bureaucracy to manage automating medical care (1). While its important to take ideological arguments with a grain of salt, there is something to the idea that bureaucratic growth can hinder economic efficiency.

This may be stretching the comparison a bit but back in 1995 I spent some time in the former East Germany. Several Germans there told me that the GDRs bureaucracy was so bad that it held back their economic development by 10 years. In contrast to the west, East Berlin was in disrepair, housing was falling down, rail transport was decrepit and environmental pollution was omnipresent. While the United States is nowhere near East Germany of the 90s, taken to its furthest logical extent too much bureaucracy can wreck an economy.

All in all, the stimulus package is good for the short term, but it comes at the cost of later good governance and economic flexibility.

If you’d like to know more, the Washington Post has a great graphic explaining exactly how and when the money will be spent. Click here.

Best,

James

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