We're From the Government and We're Here to Help

The folly of fiscal stimulus packages


In the best of times, most members of Congress are to fiscal irresponsibility what alcoholics are to the bottle—unable to resist even though they know they should. So imagine how our leaders will behave once they are told that budgetary indiscipline is no longer a vice but a virtue.

That's the counsel now from some economists and all three major Democratic presidential candidates. With a possible recession looming, they insist the federal government needs to provide a stimulus to the economy by spending or rebating money it doesn't have. That will put more cash in the pockets of consumers, who will then spend it, boosting the fortunes of companies and their employees and staving off a downturn. Or so the thinking goes.

Hillary Clinton has proposed a package that includes money to help homeowners pay mortgages they should not have taken out, as well as funds for "alternative energy investments" that might fail the cost-benefit test on their strict merits, and possibly direct rebates, too. Barack Obama wants to provide immediate tax cuts of $250 per person, while encouraging jobless workers to remain jobless by extending the time they can collect unemployment benefits. John Edwards' plan includes many of the same elements.

But skepticism is in order. Any money that the government lays out, after all, will not drop miraculously from the sky. Since the federal budget is already running a deficit, those funds will have to be obtained the old-fashioned way—by borrowing. More money would be spent by those who get the help, but less would be spent by those who provide it. So the whole transaction may add up to not much more than zero.

Giving money to people, as Obama urges, is the most direct type of stimulus. Oddly, though, there are only paltry grounds to prove it actually works. In 2001, the Treasury mailed rebates of $300 to $600 to taxpaying households, something the Bush administration later credited for invigorating the economy. In reality, later studies found, people generally declined to go out and spend, preferring to save the money or pay down debt. The booster rocket never left the launch pad.

Back in 1993, by contrast, President Clinton said a fiscal stimulus was essential to revive economic growth. But Congress refused, and the productive sector somehow managed to grope its way, unstimulated, into the longest peacetime expansion in history.

In their more sober moments, economists offer numerous reasons to treat fiscal stimulus as a wasteful charade. William Gale and Samara Potter of the center-left Brookings Institution noted in a 2002 study that tax changes of the sort being contemplated today have "a weak record in stimulating short-term economic activity."

Even if you believe a fiscal stimulus can work, it's unrealistic to think these plans would do the trick. Clinton and Obama envision packages worth $70 billion and $75 billion, respectively. But that amounts to just one-half of 1 percent of our annual output. It's like giving you a dollar every time you spend $200. Would that change your total economic activity? No? Then it probably won't rev up the nation's.

Another problem is that to succeed, a transfusion of federal cash has to be timed just right. That is not easy given that a) the legislative process often moves at the speed of continental drift and b) the president and Congress can't agree on whether the ocean is salty.

Peter Orszag, director of the Congressional Budget Office, told The Wall Street Journal, "Most of the stimulus options under consideration would be difficult to actually get out the door in the first half of 2008." By the time a program spreads its healing balm, we may find the recession has died a natural death—or was never born.

So we don't know that these efforts to stimulate the economy will have the helpful impact that has been promised. We do know, however, that they will have one regrettable consequence: putting the government—and thus the taxpaying public—deeper in debt.

We may never reap the benefits of a fiscal stimulus, if it comes to pass. But rest assured, we'll be paying the price for years to come.