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From the July 19, 2010, issue of National Review.
From 2008 to now, the composition of the stimulus bills has changed, from mostly tax rebates intended to boost consumer demand to mostly income transfers from the employed to the unemployed and from the federal government to the states. Though the stimulus machine’s architects would be loath to admit it, this transformation represents the failure of its stated purpose, which is to create jobs and to jump-start sustainable economic growth. The unemployment rate is stalled out at around 10 percent, and no growth model that relies on continued infusions of borrowed money is sustainable. The stimulus machine is designed to provide the illusion of growth in the absence of a solution to the jobs problem, and since no one in Washington seems to know how to solve that problem, it is going to be very difficult, as a matter of politics, to turn the machine off.
The mechanics of the machine are simple. Politicians feel an irresistible compulsion to “do something” about persistently high unemployment, yet they lack the will or the ability to do things that might actually work: so they give away money. Republicans are not exempt from the laws that govern this system: The Economic Stimulus Act of 2008 passed with the support of 169 House and 32 Senate Republicans and was signed by a Republican president. Granted, this was the least objectionable of the five stimulus bills. It consisted mostly of individual tax rebates and temporary enhancements to business-tax deductions, and was intended to provide a “booster shot” to the economy by encouraging spending and hiring.
But consumers and businesses tend to make spending and hiring decisions based on long-term income expectations, not short-term windfalls, as the late economist Milton Friedman explained. And as Friedman would have predicted, the 2008 stimulus had little effect on economic growth, and it certainly failed to prevent the economy from spiraling into a recession as large problems in the banking sector came to light. The best that can be said for the 2008 measure is that policymakers minimized the inefficient allocation of resources by giving the money to the private sector instead of spending it themselves. For the most part, that was not the case with the stimulus bills that followed.
Democrats in Congress started talking about a “second stimulus” as early as the summer of 2008, just a few months after the rebate checks from Stimulus I started rolling out the door. This time, however, they wanted the stimulus to be weighted toward government spending instead of tax rebates. In September, the House passed a $61 billion package consisting of infrastructure spending, expanded unemployment benefits, and aid to cash-strapped state governments, but opposition from Senate Republicans and the Bush White House doomed the bill’s chances. No matter, said Democratic congressman Barney Frank: “We’ll just wait until January.”
The Democrats are pushing for yet another stimulus package to revive our moribund economy. As of this writing, they have been unable to round up the requisite 60 votes to push the package through the Senate. President Obama has urged deficit-wary moderates to get on board, calling the bill “essential” to addressing the ongoing economic “emergency.” A handful of senators stand in his way, unopposed to the spending in principle but unwilling to vote for another bill that adds to this year’s $1.3 trillion deficit.
From 2008 to now, the composition of the stimulus bills has changed, from mostly tax rebates intended to boost consumer demand to mostly income transfers from the employed to the unemployed and from the federal government to the states. Though the stimulus machine’s architects would be loath to admit it, this transformation represents the failure of its stated purpose, which is to create jobs and to jump-start sustainable economic growth. The unemployment rate is stalled out at around 10 percent, and no growth model that relies on continued infusions of borrowed money is sustainable. The stimulus machine is designed to provide the illusion of growth in the absence of a solution to the jobs problem, and since no one in Washington seems to know how to solve that problem, it is going to be very difficult, as a matter of politics, to turn the machine off.
The mechanics of the machine are simple. Politicians feel an irresistible compulsion to “do something” about persistently high unemployment, yet they lack the will or the ability to do things that might actually work: so they give away money. Republicans are not exempt from the laws that govern this system: The Economic Stimulus Act of 2008 passed with the support of 169 House and 32 Senate Republicans and was signed by a Republican president. Granted, this was the least objectionable of the five stimulus bills. It consisted mostly of individual tax rebates and temporary enhancements to business-tax deductions, and was intended to provide a “booster shot” to the economy by encouraging spending and hiring.
But consumers and businesses tend to make spending and hiring decisions based on long-term income expectations, not short-term windfalls, as the late economist Milton Friedman explained. And as Friedman would have predicted, the 2008 stimulus had little effect on economic growth, and it certainly failed to prevent the economy from spiraling into a recession as large problems in the banking sector came to light. The best that can be said for the 2008 measure is that policymakers minimized the inefficient allocation of resources by giving the money to the private sector instead of spending it themselves. For the most part, that was not the case with the stimulus bills that followed.
Democrats in Congress started talking about a “second stimulus” as early as the summer of 2008, just a few months after the rebate checks from Stimulus I started rolling out the door. This time, however, they wanted the stimulus to be weighted toward government spending instead of tax rebates. In September, the House passed a $61 billion package consisting of infrastructure spending, expanded unemployment benefits, and aid to cash-strapped state governments, but opposition from Senate Republicans and the Bush White House doomed the bill’s chances. No matter, said Democratic congressman Barney Frank: “We’ll just wait until January.”
