800 Billion Reasons To Be Worried

The Senate stimulus bill should only stimulate taxpayer anger

Veronique de Rugy | February 10, 2009

How bad is the stimulus bill just passed by the Senate? Well, at least as bad as the one passed last week by the House of Representatives, but probably not as bad as the final bill that will land on President Barack Obama's desk, possibly as soon as the end of this week.

Don't take my word for it. In a report to Sen. Judd Gregg (R-N.H.), the nonpartisan Congressional Budget Office (CBO) laid out in plain English—well, economic language—that the Senate bill would eventually cause not a stimulus but a recession in "the longer run." As CBO's director Douglas W. Elmendorf wrote on February 4:

At your request, the Congressional Budget Office (CBO) has conducted an analysis of the macroeconomic impact of the Inouye-Baucus amendment in the nature of a substitute to H.R. 1 [the House stimulus bill]. CBO estimates that this Senate legislation would raise output and lower unemployment for several years, with effects broadly similar to those of H.R. 1 as introduced. In the longer run, the legislation would result in a slight decrease in gross domestic product (GDP) compared with CBO’s baseline economic forecast.

On the CBO's The Director’s Blog, Elmendorf explains why the Senate legislation would eventually reduce economic output: “The principal channel for this effect is that the legislation would result in an increase in government debt. To the extent that people hold their wealth in the form of government bonds rather than in a form that can be used to finance private investment, the increased government debt would tend to 'crowd out' private investment—thus reducing the stock of private capital and the long-term potential output of the economy.”

The CBO's latest projection for fiscal year 2009's deficit is that it will reach $1.2 trillion (that’s eleven zeros after the 2) before factoring in any stimulus spending or war spending. That’s 8.3 percent of GDP and far higher than any deficit under President Ronald Reagan in the 1980s (when deficits reached 6 percent of GDP). In fact, you have to go back to World War II to find deficits higher than the projections for FY 2009.

Truly massive deficits won't surprise anyone who has looked at the Senate version of the stimulus bill. Much has been made over the "compromises" and negotiations behind the Senate finally arriving at something that garnered enough support for passage. Here are three large categories of expenditures where senators managed to sort out their differences and find a compromise that they can all live with. If only things were so simple for us taxpayers.

1. Billions of dollars in spending exclusively devoted to benefit federal employees.

• $5.5 billion for making federal buildings "green" (including $448 million for the Department of Homeland Security's headquarters)
• $198 million to design and furnish the DHS headquarters
• $200 million for workplace safety in Department of Agriculture facilities
• $75 million for the Smithsonian Institution
• $300 million more for hybrid and electric cars for federal employees (see below)
• $180 million for construction of Bureau of Land Management facilities
• $500 million for wildland fire management
• $110 million for construction for the U.S. Fish and Wildlife Service
• $522 million for construction for the Bureau of Indian Affairs
• $412 million for Centers for Disease Control headquarters
• $500 million earmark for National Institutes of Health facilities in Bethesda, Maryland
• $100 million for constructing U.S. Marshalls office buildings
• $300 million for constructing Federal Bureau of Investigation office buildings
• $800 million for constructing Federal Prison System buildings and facilities
• $307 million for constructing National Institute for Standards and Technology office buildings
• $1 billion for administrative costs and construction of National Oceanic and Atmospheric Administration office buildings

That spending was added to an earlier version of the bill, which also benefited federal employees by splurging on things such as the following:

• $600 million to buy hybrid vehicles for federal employees
• $125 million for the Washington, D.C. sewer system
• $75 million for salaries of employees at the FBI
• $6 billion to turn federal buildings into “green” buildings
• $88 million for renovating the headquarters of the Public Health Service
• $5.5 million for “energy efficiency initiatives” at the Veterans Administration's “National Cemetery Administration”
• $60 million for Arlington National Cemetery
• $75 million to construct a new “security training” facility for State Department Security officers when they can be trained at existing facilities of other agencies
• $110 million to the Farm Service Agency to upgrade computer systems
• $200 million in funding for the lease of alternative energy vehicles for use on military installations

2. Wasteful spending that is not directly targeted at federal employees:

Arguably the best item in the Senate bill is a $1,500 tax credit to anyone that purchases “neighborhood electric vehicles”—also known as golf carts. The total estimated cost of that giveback is $300 million. Purchasers of motorcycles and three-wheelers shouldn't despair, however, as there are benefits available for them, too.

And then there are these:

• $2 billion for a FutureGen near-zero emissions powerplant in Mattoon, Illinois
• $2 billion for manufacturing advanced batteries for hybrid cars
• $650 million for the digital TV (DTV) transition coupon program
• $1.2 billion for summer jobs for youth
• $200 million for public computer centers at community colleges and libraries
• $750 million earmark for the National Computer Center
• $10 million to fight Mexican gun-runners
• $850 million for Amtrak (on top of its regular subsidy)
• $100 million for lead paint hazard reduction
• $275 million for flood prevention
• $65 million for watershed rehabilitation
• $650 million for abandoned mine sites
• $1.3 billion for NASA (including $450 million for "science" at NASA)
• $100 million to clean up sites used in early U.S. atomic energy program
• $10 million for urban canals
• $1.5 billion for carbon capture projects under sec. 703 of P.L. 110-140 (though the original section only authorizes $1 billion for five years)
• $500 million for state and local fire stations

3. Tax cuts and tax breaks that don't deliver anything close to real reform.

The Senate bill supposedly wooed a few recalcitrant Republicans by trimming spending (see above) and throwing in simple, clear-cut, and effective tax cuts. The tax portions of the Senate stimulus bill do contain approximately 40 separate tax-related provisions aimed at boosting the economy, amounting to an estimated $385.3 billion in cuts and government give-backs.

The Senate might have done something straightforward, like cutting the corporate income tax or cutting the payroll tax that all workers pay. Instead, most of the provisions are tax credits, many of which are refundable. In other words, individuals and businesses need to pay their taxes up front and then will get money back from the government. These sorts of programs, aimed incentivizing investment, are better understood as spending programs disguised as “tax cuts.”

Among the various tax provisions are programs such as the following:

• The “Making Work Pay” credit: This would provide a refundable tax credit of $500 to individuals making up to $75,000 and a credit of $1,000 for couples making up to $150,000. It is intended to act as a refund of the Social Security payroll taxes paid by workers, though even those with no tax liability would also qualify to receive a check from the government for the amount of the refundable credit. Additionally, workers receiving this tax credit would receive credit as if they had paid into Social Security and thus accrue benefits toward a retirement pension. The Making Work Pay tax credit is the centerpiece of the Obama “tax cuts."
  
  However, they are akin to welfare checks. Such tax credits are not likely to stimulate the economy because they provide no incentive for individuals to be more productive, but would simply pay them whether or not they were productive. Also, the potential consumption that might result from the tax credits will not have an effect on job creation. Business owners might notice a blip in their sales but they know that it is the result of a one-time tax credit. They won’t build new factories or hire more employees based on a blip. The total cost of this is expected to be $140 billion.

• Temporary Increase in the Earned Income Tax Credit or EITC: The EITC is a refundable tax credit available to low-income individuals, which increases with the number of children. Those that earn approximately $13,000 per year receive the maximum benefit (currently $5,028) and those who earn higher incomes receive lesser amounts. The stimulus proposal would increase the tax credit for those with three or more children, raising the total tax credit by about $600. EITC is essentially a welfare program, and while it may help shield its recipients from poverty, it is purely redistributive and will not spur economic growth.

• Temporary Increase of Refundable Portion of Child Credit: Individuals with children qualify to receive a refundable tax credit of $1,000 per child until 2010, at which point it returns to $500 per child. If the individual does not owe any taxes, the tax credit is refundable only for those that make more than $12,550, which is intended to assist low-income working parents. The stimulus proposal would lower the amount that parents would have to earn to $6,000. By lowering the amount of income to $6,000, it might decrease the incentive for people to be profitably employed, and therefore would have the opposite of a stimulative effect on the economy.

• Waiver of Requirement to Repay First-Time Homebuyer Credit: Current law allows first-time homebuyers to receive an interest-free federal loan of $7,500 (in the form of a refundable tax credit) to purchase a home. The loan has to be repaid over 15 years through an individual's tax returns. The stimulus proposal would waive the repayment requirement, effectively giving all first-time homebuyers a $7,500 credit. This proposal may stimulate the purchase of homes, but do we really need the government to push people toward home purchases? In a time when the housing market is contracting to correct the abuses of the past, it is misguided to assume that additional interventions to spur home purchases will help the economy.

• Build America Bonds: The stimulus creates an incentive to invest in municipal bonds that provide financing for public building projects. Like many of the other bonding provisions in the bill, this gives an incentive for private capital to flow toward public investment rather than private. Public investments are only going to promote economic growth if the government decides to use the funds more productively than they would otherwise be used in the private sector. There is no reason to think, however, that the government has suddenly become better at investing people’s money.

There are many more bad policies and spending decisions in the Senate stimulus bill, but even a cursory glance at the parts outlined above give a good sense of the overall legislation—and what is likely to be signed into law by President Obama.

And here is one more thing to consider: There is absolutely no evidence that any stimulus package in the past 80 years has goosed economic activity—not FDR’s during the Great Depression, not Japan’s during the 1990s, and not George W. Bush’s in 2001 and 2008. If anything, the economic evidence suggests that such spending packages actually intensified and prolonged misery.

Instead of rushing through legislation that will likely have no short-term effect on the economy, is guaranteed to have negative long term ones, and that serves the traditional interest groups that politicians are always busy catering to, the Senate should have cut spending like Ireland is now doing and cut marginal tax rates across the board. That would not only have stimulated the economy, it would have been fiscally responsible considering the massive entitlement crisis that is coming our way. But such legislation, alas, will have to wait for another day. Or another crisis.

Veronique de Rugy is a Reason columnist and a senior research fellow at the Mercatus Center at George Mason University.