The largest economic stimulus package ever introduced by a government will — in all likelihood — be signed into law this week. Unfortunately, President Obama tried too hard to stay true to his campaign promise of bipartisanship, and in so doing gave worthless stimulus concessions to the Republican caucus. Of the stimulus bill that was passed by the House last week, at least one third — $275 billion — was appropriated for tax cuts. While tax cuts may make the most sense to Republicans ideologically (supply side rules!) and politically (“starve the beast,” in the words of Paul Krugman), it, like so many conservative ideas, does not stand up to the realities of economics.
No one likes debt, but a crisis of massive proportions calls for an intervention of massive proportions. With interest rates effectively at zero, and no demand coming from consumption, investment or exports, there is only one way to get the economy moving again, and that is through government action. John Maynard Keynes lives again! Furthermore, tax cuts are equivalent to government spending, as lower government revenue will have to be covered by borrowing. Having accepted the necessity of government debt, it is crucial that we make sure that money spent is money spent wisely.
Look no further than Moody’s Economy, a nonpartisan and highly respected economic analysis center. Last week they released a study that looked at the impact (in terms of one-year change in GDP) of stimulus dollars in various forms. Surprise: dollars put aside for tax cuts have the least impact on the GDP. Depending on the type of tax cut, from a payroll tax holiday to a cut in the corporate tax rate, returns range from a 28 percent return to a 70 percent loss (respectively for the two examples given). In fact, only four of the proposed cuts actually show a positive return, averaging 14 cents on the dollar.
Also analyzed by Moody’s was the effect of spending increases. They determined every dollar spent on infrastructure results in a $1.59 boost to the economy, a 59 percent return. This return is among the highest, edged out by extended unemployment insurance benefits at 63 percent and a temporary increase in food stamps at 73 percent. Unemployment insurance and food stamps are important catalysts for immediate spending, but the most prudent area in which to spend is infrastructure.
While the package currently on the table does include infrastructure spending, it seems to be neither sufficient nor in the correct sectors. For example, much of the money will go toward the computerization of medical records; this is important, but not particularly stimulating. Missing are the concrete and steel projects that not only give high one-year returns (construction, engineering, management, legal, etc.), but make our country economically competitive for decades to come. And no better time than now.
Last week, the American Society of Civil Engineers released a report card on the state of America’s infrastructure — we might want to look into getting a tutor. The grades, in 15 categories, ranging from aviation to drinking water to levees, consist exclusively of C’s and D’s. But it doesn’t take an engineer to notice our crumbling infrastructure: 600,000 homes currently without power in Kentucky (expected to last several weeks), the 2007 collapse of Minnesota’s Mississippi River Bridge and New Orleans’ levees, to name just a few examples.
While the thought of an infrastructure overhaul would make Reagan roll over in his grave, I ask you this: If not the government, then who? I see no companies lining up to shoulder the bill for new bridges, water reservoirs or sewage systems — things even the most radical supply-sider would admit we need.
Bipartisanship is all well and good, and Obama should not give up his ideals. All the same, the House Republicans’ unanimous “nay” and ensuing celebration of solidarity last week indicates a lack of understanding of the severity of the situation. Obama is the president, and with a significant (though not “super”) majority in the Senate, he should put aside bipartisanship and do what he knows is best to stimulate the economy.