Stimulus is Needed & Will Mean Big Spending

Whether you are an avid supporter of Barack Obama, a perennial political skeptic, a critic, or a staunchly ideological opponent, it is clear that there must be some sort of vast, perhaps unprecedented economic stimulus put into effect in order to slow or reverse a now spiraling economic downturn. And, all have to admit as well, it is a very risky thing to gamble one’s political capital, at such a crucial moment in American history, on a huge spending package that might not have a very visible effect in the immediate short term.

Stimulus means spending, and that’s why it’s a gamble. It can mean spending by issuing cash tax-credit payouts, which consumers can then use as they please (this will likely lead only to the paying of already existing bills, which tends to be less stimulative, especially when banks are not issuing new credit freely). It can mean spending on public works, which will spur industrial output and is likely the most serious motivator of job-creation.

But stimulus spending can also come in the form of tax cuts. Republicans and self-professed “fiscal conservatives” like to say that tax cuts are the opposite of spending, but they are, in a way, a more expensive form of government spending. Tax cuts are a transfer of wealth from the government back to the people; they amount to an opportunity cost to the government, meaning there will be lower revenues in the future with which to fund government programs.

If everyone involved is honest about it, the aim of reducing the funding available for government programs is almost always part of a hard-line push for large tax cuts — not stimulus or the right of the individual to spend as he or she chooses. Reference: the single-party Republican reign from, 2002 through 2007, saw the most massive expansion of “pork-barrel spending” in history, and George W. Bush’s budgets were not only by far the most expensive in history, but led to more national debt than all 42 presidents before him combined.

Tax cuts are potentially “more expensive” for a number of reasons: reduced future revenue, the actual immediate payout in the first year, the fact that they are often accompanied by continuing “credits” and the reductive multiplier effect of limited federal funding to key areas where social capital accumulates, like the educational system or the standard of living of the elderly.

Tax cuts also lead directly to increased government borrowing, a cost that will have to be paid by future generations —ironically, this is one of the injustices of which proponents of massive “tax relief” accuse those who favor spending on public works and social programs— which will thus have a real economic cost, incurred from the past borrowing of underfunded government.

In point of fact, not one Republican administration in recent decades has reduced the overall federal budget, despite claims about “reducing government”. The biggest reduction in the “size” of government, in terms of personnel and number of overlapping departments was the “Reinventing Government” project initiated by the Clinton White House and overseen by then VP Al Gore. Under George W. Bush, perhaps the most radically tax-cut oriented president, budgets ballooned and deficits soared out of control.

So, tax cuts are not strictly stimulative; they are strictly a way of moving money, over the long term, from one part of the economy to another, while hampering (sometimes severely) the government’s ability to act on behalf of the people in times of crisis or to build social capital for the future. This can impede the ability of government to respond to natural disasters, like Hurricane Katrina, or to devote the necessary resources to a massive military undertaking, like the war in Iraq, far more expensive than planned, but still understaffed from the outset.

The “Obama plan”, as so many are now calling it, and which the president himself is now passionately advocating and defending is only loosely Obama’s at all. He laid out a series of precepts he wanted Congressional action on “economic recovery and reinvestment” to follow, and the legislation was crafted largely by Democrats in the House of Representatives, with the Senate offering some changes and some increases in the amount to be spent.

He personally has sought the counsel and the collaboration of Republican leaders, and has pushed to include some Republican proposals in the House Democrats’ draft of the legislation, which Republicans seem to have ignored once they opted for total opposition. Pres. Obama has delivered on his promise to make the process of economic recovery an open and inclusive process where citizens, multiple parties, business and academics, can all have their say and argue for specific changes.

Republicans who seek to oppose the new president, either on the grounds of strict fiscal conservatism (which they believe rules out large government initiatives of this kind) or because they feel they can seize a moment of national crisis to blame him for a mess that has nothing to do with him and thereby dampen the public enthusiasm he has inspired, will have to tread carefully, because the high stakes of the moment, and the degree to which they have underestimated both the man and the resonance of his message, mean they may hit the wrong note and pin themselves with the charge of pointless obstructionism when they can least afford it.

The Republican party has opted for a deliberate and impassioned rejuvenation of their time-tested argument that tax cuts are the best medicine for economic output, no matter the circumstances, no matter how little they are “targeted” to the problem. Word is the agreement being hashed out, as a “gang of 20” seeks to reduce the Senate’s stimulus plan from $920 billion to $780 billion, by cutting funding and making the bill 42% tax cuts, will take out a lot of education-directed spending.

House Speaker Nancy Pelosi, the most powerful member of Congress and 3rd in line to the presidency, has said those cuts will “do violence to the future” and analysts suspect the House Democrats will not accept such cuts. The irony is that studies show clearly that one dollar of education spending produces a higher long-term return than one dollar of tax relief, a clear signal of the effect on overall wealth-generation and economic output.

Stimulus is necessary, or the banking system will continue to move as slowly as the complex range of fears riddling the system will allow, and recovery will be long in coming. But talk about town is now that the Republican party seeks to “blow the house up” or sabotage the entire concept of stimulus spending. Rep. Sessions (R-TX) suggested his party should take a cue from the Taliban “to disrupt and change a person’s entire processes”, presumably a reference to Congressional efficacy or the will of voters.

Moody’s reports that one dollar of “non-refundable tax rebates” tends to produce $1.02 in “economic activity”. Meanwhile, every dollar spent on infrastructure creates $1.59 in economic activity. While the minority wants to cut social spending even where food stamps and aid to those who are too poor to pay taxes would be excluded, food stamps are reported to produce $1.73 in economic activity, one of the highest known single direct ways of producing economic stimulus.

So spending is more efficient at bringing economic stimulus, but it may take longer for the money involved in that spending to reach the demographic of voters who contribute the majority of the Republican party’s campaign funding. Could that be the reason for opposing the most rational economic stimulus program proposed since the recession began more than a year ago? It could, but for now, we only have the evidence that the party truly believes that doing less and producing less stimulus would be “more stimulative”.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s