The stimulus package and why John Boehner is being stupid

It still amazes me how the Republican party so easily gets away with making blanket claims that fly in the face of all evidence and research. John Boehner and the Republican caucus in the House have declared that they cannot vote for the bill as it is because 1) it supposedly doesn’t contain enough tax cuts and 2) it contains  spending that will do nothing to help the economy. Amazingly enough, he’s wrong on the first argument and 85% wrong on the second.

Tax cuts and “stimulus checks” do very little to actually stimulate the economy. In theory they sound great — with a tax cut, you keep more money, and with a stimulus check you’re given more money. With all this extra money, you’re going to go out and buy stuff, right? Right? Well, yeah, some people (like me when I get my check) are going to go out buy a TV or something. However, as crazy as it may sound, when times get tough, Americans start acting responsibly. They get the extra money, and they don’t spend it — at least not how the government wants them too. Most of us won’t buy TVs or new cars. Most of us will use the extra cash to pay down our credit card debt, or to help pay the mortgage, or we’ll just save it, knowing that employment is not totally secure, and we may need it later.

Well that’s great for us, we’ve got a little extra money. Unfortunately it flies in the face of the idea of “stimulus.” It doesn’t get the economy moving again — and most economic research, and hell, recent history, proves this point.

On the other side of stimulus is public spending. This would entail infrastructure projects, medicaid, unemployment benefits, food stamps, and the like. While stimulus checks and tax cuts have almost no “multiplier effect” — that is, you’re putting $250 billion into the economy, and so that will be about $250 billion more — every dollar of public spending equals about $1.50 in growth. So if I spend $100 billion on food stamps, studies and research have shown that such spending equals about $150 billion in economic growth. Now the stimulus package isn’t spending $100 billion on food stamps, but the breakdown of the spending (total $825 billion, for now) favors public spending.

Why? Because public spending translates into more growth and economic activity than tax cuts, and that’s what we need.

Now on to the second argument. Boehner has argued that the bill contains provisions that have nothing to do with economic recovery. His biggest peeve is apparently the $300 billion in spending that will go to help states. This includes healthcare (which includes money to cut costs on prescription drugs, including contraceptives, which as drawn criticism), infrastructure, and education spending. Boehner has stated that these (with the exception of the infrastructure projects and transportation spending) have nothing to do with economic stimulus.

He’s partly right, and partly wrong. Many of these provisions aren’t necessarily stimulus, but they have a lot to do with economic recovery. I argued a couple of months ago that a big part of the solution for the economic mess was financial aid to the states to help stop the bleeding. Because of budget shortfalls, many states are having to make serious cutbacks. There are the extreme cases like California with a $40 billion shortfall, but the example I want to use (partly because I know a lot more specifics) is Georgia.

Georgia needs to make up for $2.2 billion budget shortfall. That’s about 10% cut from last years $21 billion budget. In order to meet these cuts, state employees are being furloughed, the state is considering cutting their “Homeowners Tax Relief Grants” which would translate into $200 to $300 in higher property taxes, National Board Certified Teachers are going to take a 10% pay cut (yes you read that right), and school nurses are getting cut from the state budget, just to name a few things — and that’s not even going to cover it all. There are hundreds of millions of dollars of cuts to the university system, and proposed tax on hospitals to cover rising Medicaid costs, and nearly $200 million in cuts to basic education.

This is what that $300 billion in spending on aid to the states is about. To prevent these kinds of cuts. That money is meant to prevent states from having to make these kinds of cuts, because, unlike the federal government, many states are constitutionally barred from running deficits. Georgia is. Others, like California, wouldn’t have been able to sell enough bonds to cover their debts when the financial markets were in good shape, now that their in shambles it would be impossible. These cuts only cause more economic problems, but there’s nothing the states can do about it, other than make the politically toxic decision to raise taxes to cover the revenue shortfall — which most won’t do.

So in order to prevent it, the federal government is stepping in to shore up state spending on areas like education, healthcare, and transportation, thereby helping preventing the hole from growing deeper while the rest of the spending (hopefully) works toward getting the economy moving in the right direction.

~ by deluxetoaster on January 26, 2009.