The more I look at the stimulus package, the less I like it
Many in the financial media have been pointing to the government's planned stimulus package aka the “American Recovery and Reinvestment Bill of 2009″ as the solution to our country's economic woes. I was even somewhat excited about the prospect of the government riding to the rescue of the economy on a white horse...until I looked the gift horse in the mouth. The more closely I look at the proposed stimulus package, the less I like it.
I blogged last week about the package will not be nearly the boon for infrastructure companies that many believe: The myth of the coming infrastructure boom. Today I sold a significant portion of my remaining holdings in companies in the sector. The small percentage of the total package that will actually be spent on infrastructure projects will be spread out over a number of different industries and some of the spending will not occur for years. I highly doubt that the new government spending will come anywhere near making up for the tremendous loss of private capital that had been flowing into the sector.
Anyone who really believes that things in the government are different now that Obama is in office really needs to read the following New York Times article: Defense and No Apologies From Author of Fiscal Bill.
I hope that Obama will eventually be able to bring the best ideas from both political parties together and eliminate the waste and pork that has existed in Washington for years, but doing so will take time. The government, and probably rightfully so, wants to put the stimulus package in action ASAP. As a result, it is going to be filled with all sorts of garbage and pet projects of the bill's authors rather than things that would be really simulative for the economy.
I realize that Republicans are always going to feud with Democrats and that it is not surprising that they are bashing the stimulus bill in its current form, but Representative Paul D. Ryan of Wisconsin, the senior Republican on the Budget Committee, makes a valid point with this quote about the bill and its author Representative David R. Obey:
“This is 1936 economics,” Mr. Ryan said. “But it reflects David’s ideology and his economic doctrine. They took everything in their file cabinet that has been piling up for 100 years, threw it in this bill and called it economic stimulus.”
While they are nice and they help people, things like $30 billion to subsidize health insurance for those who lose their jobs and $15 billion to increase college Pell Grants will do very little to stimulate the economy right now, which is what we need.
Even the tax cuts in the proposed bill stink. More than half of the cuts in their current form are $500 tax credits for people who earn less than $75,000. Didn't we learn our lesson when the government sent out the stimulus checks last year?!?! Studies have shown that one-time tax breaks are more likely saved than spent. They don't do nearly as much to stimulate economic activity as permanent tax cuts do. This tax cut is stupid. It will not get spent with consumer confidence sitting at such a low level and the jobless rate rising.
This sort of half-assed tax credit doesn't cut it. By nature, the government is wasteful, just like any other large organization is. Friedman had a very valid point that government spending does not really stimulate demand because every dollar spent by the government must be eventually paid for with taxes that are taken out of the economy. One could argue that deficit spending to help us out right know when the economy really needs it is necessary. Fine, but it you're going to do it, do it right. Either give Americans a real tax cut and stop wasting money on pet projects OR spend the money on real projects that provide a lasting benefit for the country and create real jobs like modernizing the power grid improving railroads, building mass transit, etc...