If we are lucky, that will be the headline four years from now when people look back on Obama’s first term. If we are not, the fiscal stimulus plan will emerge largely unchanged in the Senate and become law. I don’t think that will happen. I have faith in our political institutions that they will not make a mistake as big and as obvious as this one. While avoiding bad laws is easier than creating good ones, it is no less a valuable skill.

The stimulus bill will be good for one thing though. It will help cement who the Obama kool-aid crowd is. Some [not me] may be willing to give a pass of sorts for the campaign bias, but reasonable people will not be supporting this bill. Anyone who praises this bill can rightly be dismissed as a political hack going forward.

Here is why the bill is so bad:

David Brooks

They’ve created a sprawling, undisciplined smorgasbord, which has spun off a series of unintended consequences.

1. The money spent on long-term domestic programs means there may not be enough to jolt the economy now (about $290 billion in spending is pushed off into 2011 and later).
2. By pumping so much money through government programs, the bill unleashes a tidal wave on state governments. A governor will suddenly have to administer an additional $4 billion or $5 billion. That money will be corrosive both when washing in, and when it disappears in a few years time.
3. Permanently alters the role of the federal government, thus guaranteeing a polarizing brawl at the very start of the Obama presidency.
4. Warnings about deficits have been put aside. There is no fiscal exit strategy. Instead, permanent spending commitments are entailed with no permanent funding stream to pay for them.

WSJ Editorial

The 647-page, $825 billion House legislation is being sold as an economic “stimulus,” is a political wonder that manages to spend money on just about every pent-up Democratic proposal of the last 40 years.

We’ve looked it over, and even we can’t quite believe it. There’s $1 billion for Amtrak, the federal railroad that hasn’t turned a profit in 40 years; $2 billion for child-care subsidies; $50 million for that great engine of job creation, the National Endowment for the Arts; $400 million for global-warming research and another $2.4 billion for carbon-capture demonstration projects.

Some $30 billion, or less than 5% of the spending in the bill, is for fixing bridges or other highway projects. There’s another $40 billion for broadband and electric grid development, airports and clean water projects that are arguably worthwhile priorities.

Add the roughly $20 billion for business tax cuts, and by our estimate only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus.

Martin Feldstein

The largest proposed outlays amount to just writing unrestricted checks to state governments. Nearly $100 billion would result from increasing the “Medicaid matching rate,” a technique for reducing states’ Medicaid costs to free up state money for spending on anything governors and state legislators want. An additional $80 billion would be given out for “state fiscal relief.” Will these vast sums actually lead to additional spending, or will they merely finance state transfer payments or relieve state governments of the need for temporary tax hikes or bond issues?

The plan to finance health insurance premiums for the unemployed would actually increase unemployment by giving employers an incentive to lay off workers rather than pay health premiums during a time of weak demand. And this supposedly two-year program would create a precedent that could be hard to reverse.

A large fraction of the stimulus proposal is devoted to infrastructure projects that will spend out very slowly, not with the speed needed to help the economy in 2009 and 2010. The Congressional Budget Office estimates that less than one-fifth of the $50 billion of proposed spending on energy and water would occur by the end of 2010.

If rapid spending on things that need to be done is a criterion of choice, the plan should include higher defense outlays, including replacing and repairing supplies and equipment, needed after five years of fighting. The military can increase its level of procurement very rapidly. Yet the proposed spending plan includes less than $5 billion for defense, only about one-half of 1 percent of the total package.

All articles referenced are copied in full at end of post.

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Cleaner and Faster

By DAVID BROOKS – January 30, 2009 – Op-Ed Columnist

Throughout 2008, Larry Summers, the Harvard economist, built the case for a big but surgical stimulus package. Summers warned that a “poorly provided fiscal stimulus can have worse side effects than the disease that is to be cured.” So his proposal had three clear guidelines.

First, the stimulus should be timely. The money should go out “almost immediately.” Second, it should be targeted. It should help low- and middle-income people. Third, it should be temporary. Stimulus measures should not raise the deficits “beyond a short horizon of a year or at most two.”

Summers was proposing bold action, but his concept came with safeguards: focus on the task at hand, prevent the usual Washington splurge and limit long-term fiscal damage.

Now Barack Obama is president, and Summers has become a top economic adviser. Yet the stimulus approach that has emerged on Capitol Hill abandoned the Summers parameters.

In a fateful decision, Democratic leaders merged the temporary stimulus measure with their permanent domestic agenda — including big increases for Pell Grants, alternative energy subsidies and health and entitlement spending. The resulting package is part temporary and part permanent, part timely and part untimely, part targeted and part untargeted.

It’s easy to see why Democrats decided to do this. They could rush through permanent policies they believe in. Plus, they could pay for them with borrowed money. By putting a little of everything in the stimulus package, they avoid the pay-as-you-go rules that might otherwise apply to recurring costs.

But they’ve created a sprawling, undisciplined smorgasbord, which has spun off a series of unintended consequences. First, by trying to do everything all it once, the bill does nothing well. The money spent on long-term domestic programs means there may not be enough to jolt the economy now (about $290 billion in spending is pushed off into 2011 and later). The money spent on stimulus, meanwhile, means there’s not enough to truly reform domestic programs like health technology, schools and infrastructure. The measure mostly pumps more money into old arrangements.

Second, by pumping so much money through government programs, the bill unleashes a tidal wave on state governments. A governor with a few-hundred-million-dollar shortfall will suddenly have to administer an additional $4 billion or $5 billion. That money will be corrosive both when washing in, and when it disappears in a few years time.

Third, the muddle assures ideological confrontation. A stimulus package was always going to be controversial, because economists differ widely about whether or how a stimulus can work. But this bill also permanently alters the role of the federal government, thus guaranteeing a polarizing brawl at the very start of the Obama presidency.

Fourth, Summers’s warnings about deficits have been put aside. There is no fiscal exit strategy. Instead, permanent spending commitments are entailed with no permanent funding stream to pay for them.

Fifth, new government expenditures on complex matters are being designed on a hasty, reckless timetable. As readers may know, the policy I am most passionate about is pre-K education. Yet I fervently hope that the Head Start expansion is dropped from this bill. A slapdash and shambolic expansion could discredit the whole idea.

Wise heads are now trying to restore structure and safeguards to the enterprise. In testimony this week, Alice Rivlin, Bill Clinton’s former budget director, raised the possibility of separating the temporary from the permanent measures and focusing independently on each. “A long-term investment program should not be put together hastily and lumped in with the anti-recession package,” Rivlin testified. “The elements of the investment program must be carefully planned and will not create many jobs right away.”

The best course is to return to the original Summers parameters — temporary, targeted and timely — thus making the stimulus cleaner and faster.

Strip out the permanent government programs. Many of them are worthy, but we can have that debate another day. Make the short-term stimulus bigger. Many liberal economists have been complaining it is too small, so replace the permanent programs with something like a big payroll tax cut, which would help the working class.

Add in a fiscal exit strategy so the whole thing is budget neutral over the medium term. Finally, coordinate the stimulus package with plans to shore up the housing and financial markets. Until those come to life, no amount of stimulus will do any good.

This recession is scary and complicated. It’s insane to try to tackle it and dozens of other complicated problems, all in one piece of legislation. Leadership involves prioritizing. Those who try to do everything at once will end up with a sprawling, lobbyist-driven mess that does nothing well.
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WSJ Editorial – A 40-Year Wish List

JANUARY 28, 2009

You won’t believe what’s in that stimulus bill.

“Never let a serious crisis go to waste. What I mean by that is it’s an opportunity to do things you couldn’t do before.”

So said White House Chief of Staff Rahm Emanuel in November, and Democrats in Congress are certainly taking his advice to heart. The 647-page, $825 billion House legislation is being sold as an economic “stimulus,” but now that Democrats have finally released the details we understand Rahm’s point much better. This is a political wonder that manages to spend money on just about every pent-up Democratic proposal of the last 40 years.

We’ve looked it over, and even we can’t quite believe it. There’s $1 billion for Amtrak, the federal railroad that hasn’t turned a profit in 40 years; $2 billion for child-care subsidies; $50 million for that great engine of job creation, the National Endowment for the Arts; $400 million for global-warming research and another $2.4 billion for carbon-capture demonstration projects. There’s even $650 million on top of the billions already doled out to pay for digital TV conversion coupons.

In selling the plan, President Obama has said this bill will make “dramatic investments to revive our flagging economy.” Well, you be the judge. Some $30 billion, or less than 5% of the spending in the bill, is for fixing bridges or other highway projects. There’s another $40 billion for broadband and electric grid development, airports and clean water projects that are arguably worthwhile priorities.

Add the roughly $20 billion for business tax cuts, and by our estimate only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus. And even many of these projects aren’t likely to help the economy immediately. As Peter Orszag, the President’s new budget director, told Congress a year ago, “even those [public works] that are ‘on the shelf’ generally cannot be undertaken quickly enough to provide timely stimulus to the economy.”

Most of the rest of this project spending will go to such things as renewable energy funding ($8 billion) or mass transit ($6 billion) that have a low or negative return on investment. Most urban transit systems are so badly managed that their fares cover less than half of their costs. However, the people who operate these systems belong to public-employee unions that are campaign contributors to . . . guess which party?

Here’s another lu-lu: Congress wants to spend $600 million more for the federal government to buy new cars. Uncle Sam already spends $3 billion a year on its fleet of 600,000 vehicles. Congress also wants to spend $7 billion for modernizing federal buildings and facilities. The Smithsonian is targeted to receive $150 million; we love the Smithsonian, too, but this is a job creator?

Another “stimulus” secret is that some $252 billion is for income-transfer payments — that is, not investments that arguably help everyone, but cash or benefits to individuals for doing nothing at all. There’s $81 billion for Medicaid, $36 billion for expanded unemployment benefits, $20 billion for food stamps, and $83 billion for the earned income credit for people who don’t pay income tax. While some of that may be justified to help poorer Americans ride out the recession, they aren’t job creators.

As for the promise of accountability, some $54 billion will go to federal programs that the Office of Management and Budget or the Government Accountability Office have already criticized as “ineffective” or unable to pass basic financial audits. These include the Economic Development Administration, the Small Business Administration, the 10 federal job training programs, and many more.

Oh, and don’t forget education, which would get $66 billion more. That’s more than the entire Education Department spent a mere 10 years ago and is on top of the doubling under President Bush. Some $6 billion of this will subsidize university building projects. If you think the intention here is to help kids learn, the House declares on page 257 that “No recipient . . . shall use such funds to provide financial assistance to students to attend private elementary or secondary schools.” Horrors: Some money might go to nonunion teachers.

The larger fiscal issue here is whether this spending bonanza will become part of the annual “budget baseline” that Congress uses as the new floor when calculating how much to increase spending the following year, and into the future. Democrats insist that it will not. But it’s hard — no, impossible — to believe that Congress will cut spending next year on any of these programs from their new, higher levels. The likelihood is that this allegedly emergency spending will become a permanent addition to federal outlays — increasing pressure for tax increases in the bargain. Any Blue Dog Democrat who votes for this ought to turn in his “deficit hawk” credentials.

This is supposed to be a new era of bipartisanship, but this bill was written based on the wish list of every living — or dead — Democratic interest group. As Speaker Nancy Pelosi put it, “We won the election. We wrote the bill.” So they did. Republicans should let them take all of the credit.
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An $800 Billion Mistake

By Martin Feldstein
Thursday, January 29, 2009; A19

As a conservative economist, I might be expected to oppose a stimulus plan. In fact, on this page in October, I declared my support for a stimulus. But the fiscal package now before Congress needs to be thoroughly revised. In its current form, it does too little to raise national spending and employment. It would be better for the Senate to delay legislation for a month, or even two, if that’s what it takes to produce a much better bill. We cannot afford an $800 billion mistake.

Start with the tax side. The plan is to give a tax cut of $500 a year for two years to each employed person. That’s not a good way to increase consumer spending. Experience shows that the money from such temporary, lump-sum tax cuts is largely saved or used to pay down debt. Only about 15 percent of last year’s tax rebates led to additional spending.

The proposed business tax cuts are also likely to do little to increase business investment and employment. The extended loss “carrybacks” are primarily lump-sum payments to selected companies. The bonus depreciation plan would do little to raise capital spending in the current environment of weak demand because the tax benefits in the early years would be recaptured later.

Instead, the tax changes should focus on providing incentives to households and businesses to increase current spending. Why not a temporary refundable tax credit to households that purchase cars or other major consumer durables, analogous to the investment tax credit for businesses? Or a temporary tax credit for home improvements? In that way, the same total tax reduction could produce much more spending and employment.

Postponing the scheduled increase in the tax on dividends and capital gains would raise share prices, leading to increased consumer spending and, by lowering the cost of capital, more business investment.

On the spending side, the stimulus package is full of well-intended items that, unfortunately, are not likely to do much for employment. Computerizing the medical records of every American over the next five years is desirable, but it is not a cost-effective way to create jobs. Has anyone gone through the (long) list of proposed appropriations and asked how many jobs each would create per dollar of increased national debt?

The largest proposed outlays amount to just writing unrestricted checks to state governments. Nearly $100 billion would result from increasing the “Medicaid matching rate,” a technique for reducing states’ Medicaid costs to free up state money for spending on anything governors and state legislators want. An additional $80 billion would be given out for “state fiscal relief.” Will these vast sums actually lead to additional spending, or will they merely finance state transfer payments or relieve state governments of the need for temporary tax hikes or bond issues?

The plan to finance health insurance premiums for the unemployed would actually increase unemployment by giving employers an incentive to lay off workers rather than pay health premiums during a time of weak demand. And this supposedly two-year program would create a precedent that could be hard to reverse.

A large fraction of the stimulus proposal is devoted to infrastructure projects that will spend out very slowly, not with the speed needed to help the economy in 2009 and 2010. The Congressional Budget Office estimates that less than one-fifth of the $50 billion of proposed spending on energy and water would occur by the end of 2010.

If rapid spending on things that need to be done is a criterion of choice, the plan should include higher defense outlays, including replacing and repairing supplies and equipment, needed after five years of fighting. The military can increase its level of procurement very rapidly. Yet the proposed spending plan includes less than $5 billion for defense, only about one-half of 1 percent of the total package.

Infrastructure spending on domestic military bases can also proceed more rapidly than infrastructure spending in the civilian economy. And military procurement overwhelmingly involves American-made products. Since much of this military spending will have to be done eventually, it makes sense to do it now, when there is substantial excess capacity in the manufacturing sector. In addition, a temporary increase in military recruiting and training would reduce unemployment directly, create a more skilled civilian workforce and expand the military reserves.

All new spending and tax changes should have explicit time limits that prevent ever-increasing additions to the national debt. Similarly, spending programs should not create political dynamics that will make them hard to end.

The problem with the current stimulus plan is not that it is too big but that it delivers too little extra employment and income for such a large fiscal deficit. It is worth taking the time to get it right.

The writer, an economics professor at Harvard University, is president emeritus of the National Bureau of Economic Research.
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