Some members of Congress are pushing a third economic “stimulus” in as many years (pundits often forget the Bush stimulus of 2008). Supporters of yet another round of deficit spending make three claims: the Obama stimulus “worked,” the New Deal brought us out of the Great Depression, and states need the money to avoid painful budget cuts. They are wrong on all counts.
The 2009 stimulus has not revitalized our economy. As of December, the unemployment rate stood at 10% – 2.5 percentage points higher than when the stimulus was enacted (and far higher than the Obama administration suggested, as a scare tactic, we would reach without the stimulus). The “jobs created” numbers released by the administration have been widely ridiculed. The Washington Examiner reports that about one-sixth of the reported jobs created were phony. More importantly, this measure only counts the seen effect, not the unseen impact of jobs destroyed when government takes money out of the private sector.
Others cite data showing fewer jobs lost in recent months to claim “Mission Accomplished.” But this is nonsense. If a company fires 100 workers one month and 50 the next (without new hires), would anyone suggest business had improved?
Even the increase in Gross Domestic Product (GDP) in the 3rd quarter of 2009 is worrisome. This growth (which was lowered in recent updates) relies on increased auto and home sales, which was fueled by temporary government subsidies in the form of Cash for Clunkers and tax credits for first-time homebuyers. These subsidies will not foster economic growth, but shift the timing of purchases, creating another “bubble,” just as government policies fostered the housing bubble that resulted in the financial crisis.
Second, that New Deal spending ended the Great Depression is a myth debunked long ago. Contrary to his do-nothing reputation, Herbert Hoover increased federal spending by 50% (in real dollars) from 1929-1933, pushed trade restrictions, and presided over tight monetary policy. In contrast, FDR’s second piece of legislation, the 1933 Economy Act, cut federal spending by 14% ($500 million) as the money supply was expanded – a combination which led to economic growth.
It was only later – while running for re-election – that Roosevelt ramped up federal spending (giving handouts in areas where he needed more votes). This new spending on federal programs, combined with tax hikes, undermined economic recovery, and unemployment rose again the late 1930s to over 20%. In 1939, FDR’s treasury secretary Henry Morgenthau said, “We are spending more money than we have ever spent before and it does not work.”
The parallels with today are ominous. While being blamed for the current economy, George W. Bush grew federal spending by over 60%, including a 63% increase in health services, 60% in education, and 43% in transportation. Meanwhile, Obama may find himself in the same shoes as FDR, proposing spending cuts at the request of the Chinese.
Recently, 222 economists signed a letter arguing that over-spending is hindering economic growth. The overwhelming evidence indicates that cutting taxes (specifically, lowering rates, as opposed to rebates or credits) has a much higher multiplier effect on economic growth than government spending.
Finally, states need to get their fiscal houses in order. As the Commonwealth Foundation predicted, the stimulus encouraged bad behavior by the states. In Pennsylvania, instead of addressing long-term fiscal issues, lawmakers retained funding for corporate welfare, kept ineffective programs, ignored dealing with needed Medicaid reforms (or even addressing identified waste and fraud in the program), and delayed addressing our looming public pension crisis.
Worse yet, Pennsylvania lawmakers drained the Rainy Day Fund and other one-time revenue sources, leaving the state unequipped to deal with future budget gaps. Governors and state legislators will again be begging Congress to bail them out from their own fiscal mismanagement, as Congress has shown they are more than willing to do-eroding our system of federalism.
Instead of another “stimulus” by the federal government, we need fiscal restraint.
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Nathan A. Benefield is Director of Policy Research with the Commonwealth Foundation (www.CommonwealthFoundation.org), an independent, nonprofit public policy research and educational institute based in Harrisburg.