It’s likely that in the run-up to the 2012 election, we will be treated to the Republican mantra that the federal government is broke and that President Obama’s $800 billion stimulus package “failed.” By any fair measure, both of those assertions are nonsense.
"We're broke, broke going on bankrupt," House Speaker John Boehner claimed in a recent speech. How does he explain that the Treasury’s credit rating is still good enough to borrow virtually unlimited amounts of money for 10 years from investors at an interest rate of 3.22 percent, only about a tenth of a percent more than is paid by Germany, the world’s benchmark for fiscal rectitude?
For sure, the government is heavily in debt, and Congress will have to raise a record $14.3 trillion gross debt ceiling later this spring in order for the Treasury to continue borrowing. But by no stretch of the imagination is this country broke, and claims to the contrary are nothing more than politically inspired fear mongering.
Turning Reality on Its Head?
Meanwhile, Boehner and others, such as Mississippi Gov. Haley Barbour, a Republican presidential aspirant, are trying to turn the reality of stimulus on its head: More government spending destroys jobs and slashing spending creates them, they claim.
“In the last two years, the federal government spent $7 trillion and our economy lost several million jobs,” Barbour told the Chicagoland Chamber of Commerce lastweek. “I guess we ought to be glad they didn’t spend $12 trillion. We might have lost 12 million jobs.”
Of course, that’s never been the way “stimulus” has been viewed by members of the House and Senate who brought home the bacon in terms of federal spending in their own states and districts. They often flex their political muscle to get such money for their constituents.
For instance, in an effort to save 800 jobs at a plant in his Ohio district, Boehner fought hard last month to continue funding for an alternative engine for the F-35 joint strike fighter plane. Both the Bush and Obama administrations had sought to cancel the second engine to save money, and despite Boehner’s influence, it was killed.
Meanwhile, there is a newly completed federal prison in Berlin, N.H., that stands empty because of uncertainty about whether Republican attempts to cut the Federal Bureau of Prisons’ budget will leave enough money to staff it. That’s ironic, because the prison was built at the urging of former Republican Sen. Judd Gregg of New Hampshire, another fiscal conservative, to provide jobs in Berlin—a shrinking, economically depressed town hard hit when its major employer, a pulp mill, closed a few years ago.
Thus, on the local level, it seems even conservatives have no real doubt that federal spending can create jobs. What about at the national level?
Fourth-Quarter Effects
The Congressional Budget Office certainly has no doubts about it. A CBO report last month said that provisions of the American Recovery and Reinvestment Act, the stimulus bill passed in early 2009, had the following effects in the fourth quarter of calendar year 2010:
* Raised the level of inflation-adjusted gross domestic product by between 1.1 percent and 3.5 percent,
* Lowered the unemployment rate by between 0.7 percentage points and 1.9 percentage points,
* Increased the number of people employed by between 1.3 million and 3.5 million, and
* Increased the number of full-time-equivalent jobs by 1.8 million to 5.0 million as additional workers moved from part-time to full-time work.
The only sense in which the stimulus failed was that the unemployment rate did not fall to 8 percent by the end of last year, as administration economists originally predicted, because the recession that followed the financial crisis turned out to be much more severe than expected.
The actual unemployment rate in the fourth quarter was 9.6 percent. The CBO analysis indicated that without the stimulus, the rate would have been between 10.3 percent and 11.5 percent. And the mid-point of the estimate for the number of additional people with jobs? More than 2 million.
For sure, many economists argued at the time that the stimulus should have been a lot bigger, and believe that the Obama administration should have shown more backbone by demanding more. But Republicans and conservative Democrats objected.
As today’s critics unjustifiably rail against the stimulus package as nothing more than excessive spending, they fail to mention that about 40 percent of the total cost wasn’t spending at all—it was stimulus in the form of tax cuts for low- and middle-income taxpayers.
And now Republicans, pushed by the new large majority in the House that includes many elected last fall with the backing of Tea Party advocates, are demanding an immediate cut of $61 billion in non-security spending in the half-year that remains in fiscal 2011. In the process, they are ignoring a warning from economist Mark Zandi of Moody’s—an adviser to presidential candidate Sen. John McCain during the 2008 election—that the cuts would quickly result in a loss of 700,000 jobs.
Two other prominent economists speaking recently at a conference at the International Monetary Fund on economic lessons learned from the financial crisis presented strong arguments that, under the right conditions, fiscal stimulus can have powerful, positive effects on an economy. Robert Solow, a professor emeritus at the Massachusetts Institute of Technology and Nobel laureate, and David Romer of the University of California at Berkeley, said emphatically the stimulus helped the U.S. economy begin to recover for the severe recession.
For stimulus to work as intended, two conditions are necessary: There is significant slack in the economy in the form of unemployed labor and idle production capacity, and the central bank does not raise interest rates to offset the stimulative impulse for increased government spending or tax cuts. Both conditions existed in 2009.
Romer said that a dozen recent studies have “nearly unanimously concluded that discretionary fiscal policy helps if monetary policy can’t.” Furthermore, he added, another study has found that when monetary policy is constrained because overnight interest rates are as low as they can go—they are close to zero in the United States today—fiscal contractions “have painful economic costs.”
Neither Solow nor Romer suggested for a moment that the U.S. government doesn’t have a long-term budget problem. It would have been much better if the fiscal tightening now underway in Washington had not begun until the recovery had advanced to the point that monetary policy was ready to tighten.
However, Romer added, “political considerations are phenomenally important.” When the crisis came along, voters’ had the “gut feeling that when ordinary people are suffering and have no choice but to cut back, then for the government to be profligate isn’t just unwise, it’s morally offensive.”
Now the new Republican majority in the House and all the GOP’s would-be presidential candidates are pandering to that gut feeling with a vengeance. The country is going to be worse off because of it.
RELATED LINKS:
Obama and Top Republicans Agree: America Is Not Broke (The Cap Times):
Economist Mark Zandi: GOP Plan Would Cost 700,000 Jobs (CBS News):