Stimulus bill needs to change

Mathew Continetti:

The economy is in recession. There's no end in sight. The number of unemployed continues to rise. Equities markets are in the dumps. The real estate sector hasn't hit bottom. The banks are drowning in a sludge of toxic assets. Excuse us while we break out the Prozac.

Washington's response? Pathetic. House Speaker Nancy Pelosi let her appropriators out of their cages and had them draft the American Recovery and Reinvestment Act of 2009. This is the economic stimulus package that everyone has been waiting for. And it's a clunker. The more you learn about the economic stimulus plan, the less you like it. Charles Krauthammer called it the "worst bill in galactic history." This is only a slight exaggeration.

What the Democrats have done is write down every single item on their liberal wish list, append dollar amounts next to the items seemingly at random, and call it "stimulus." The president wanted the bill to be free of pet projects and include business tax cuts. But no one told Pelosi's appopriators. They are using the current troubles to push through a decades-old domestic policy agenda. The spending--$50 million for the National Endowment for the Arts, $400 million for global warming studies--demonstrates that the bill has no overarching logic.

Which makes it a major disappointment. Almost everybody agrees that the economy is a mess and that fiscal policy might help tidy things up. But $6.2 billion for "home weatherization"?

The problem with the House plan is that it is ineffective even on Keynesian grounds. Keynes said that, once monetary policy has reached its limit, fiscal policy must take priority. In other words, when interest rates have effectively reached zero, governments must lower taxes and increase spending to rebalance the economy. But the House bill is half-baked Keynes. And it will fail.

It will fail because it is imperfectly designed. A well-designed stimulus meets three criteria. It's large. It's fast. You like what you get out of it. But the Democratic plan is none of these. When you look closely at the House bill, you realize that it's not so big after all. Nor will the money be spent quickly. And the things we get out of it? Small fry.

The Congressional Budget Office projects that the House bill will cost $816 billion. Of that, $248 billion is in aid to states for Medicare and Medicaid, unemployment insurance, and so on. Another $212 billion is in tax cuts. This leaves $356 billion in discretionary spending.

It's hard to argue that the $248 billion in transfers to the states will stimulate the economy. The money is being taken from one pot and put in another so that the states can balance their books and ensure the proper treatment of beneficiaries. It doesn't prime the pump. It just keeps the pump from falling apart.

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There is much more. The "tax cut" in the bill does not stimulate the economy. To do that the cuts would have to be aimed at businesses and Democrats just do not get the importance of business tax cuts. They don't seem to comprehend that businesses don't pay taxes they merely collect them for the government from their customers. If they lower business taxes the business can reduce prices to attract more customers or invest in expansion of the business creating more jobs. Even if the business uses the additional money to pay dividends taht benefits retirees who hold the company's stock.