‘Stimulus’ Not the Way To Reboot the Economy
Special to Roll Call
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In weighing further measures to bolster the U.S. economy, Congress must recognize that real, sustained growth comes from the work, savings and investment of American families and businesses — not from the federal government.
We can, and should, take immediate action to address a weak economy with initiatives that produce lasting economic gains. What we cannot do is borrow and spend our way into prosperity, building up huge federal deficits and calling it “stimulus.”
The intent of a second so-called stimulus — as advertised by the Democratic majority and President-elect Barack Obama — is “to get the economy back on track.” But there is no evidence another huge infusion of federal dollars will stimulate anything more than a temporary jolt in consumer spending, after which the economy returns to its previous course.
The only lasting gains of stimulus spending will likely be in higher deficits and debt — both of which are soaring. In fact, after three straight years of declines, the deficit this past year more than doubled, to $455 billion. If the Democratic Congress passes its additional spending package — reported to have ballooned to between $500 billion and $750 billion — the deficit will likely blow right through the $1 trillion mark this year — the largest ever in nominal terms, and the largest as a share of the economy since World War II.
So while the long-run costs of stimulus spending packages are real, the long-run benefits are, at best, highly suspect. The reasons these temporary fiscal spending packages fail to fix the economy are many. Key among them: They do nothing to address the core problems of our current financial crisis and economic weakness; they do nothing to change the main factors driving our long-term growth trajectory; and they do nothing to promote real growth.
For the most recent example of stimulus failure, we can look to the results of the tax “rebates” enacted earlier this year. Instead of spending the extra cash, as proponents had hoped, most recipients simply paid off bills or saved the money. The stimulus boosted consumer spending by less than $20 billion but added nearly $80 billion to the national debt.
For the most haunting example of stimulus failure, we can look to Japan’s “lost decade” of the 1990s. With its economy in a sharp slowdown, the Japanese government pursued an aggressive round of fiscal stimulus packages after 1993. The spending, mostly concentrated on infrastructure, eventually pushed Japan’s budget deficit to nearly 10 percent of gross domestic product by 1999, while total government debt increased to 130 percent of gross domestic product. Looking back on that decade, the Economist magazine concluded: “Japan’s policymakers ... appear to have followed the Keynesian textbook ... yet, the economy is still flat on its back.”
In short, the folly of relying on stimulus to correct a weak economy is the belief that the federal government can generate real, sustained growth and job creation. Of course, it cannot. Government doesn’t create new jobs and prosperity — only real investment in the private sector, and expansion of U.S. economic activity, do. Put simply, because every dollar Congress spends must first be taken from the economy, Congressional spending can’t grow the economic pie — it just redistributes the slices.
There are legitimate steps Congress can take to help the American economy in both the near and long term. These include the following:
• Provide Help to Those Who Need It. With the economy still shedding jobs, it makes sense to extend unemployment benefits, as we have already done.
• Support Real Policies for Growth. Fast-acting tax policy — such as allowing expensing on all new investments — would boost incentives to expand business operations and create jobs. In addition, lowering the corporate income tax rate — currently the second highest in the industrialized world — would help attract investment in the U.S., and reduce the incentives to shift business operations, and jobs, overseas.
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