NCPA - National Center for Policy Analysis

WILL THE $800 BILLION-PLUS STIMULUS PLAN BRING ECONOMIC RECOVERY?

February 10, 2009

The Obama economic recovery package passed by the House of Representatives (H.R. 1) contains both individual and business tax relief (about $275 billion) and government spending (about $550 billion).  The tax relief measures for individuals and businesses are mostly lump-sum payments, which evidence indicates are largely saved or used to pay down debt.  Consequently, there will be little consumption increase from these payments, says Gerald W. Scully, a senior fellow with the National Center for Policy Analysis.

Spending programs in the stimulus bill include $150 billion for health care, about $140 billion for education and about $90 billion for infrastructure.  The Congressional Budget Office (CBO) estimates that only 38 percent of the new spending will occur by September 30, 2010.  Including the tax relief, approximately 64 percent of the stimulus package will be spent by then.  The bottom line:

  • Only about $100 billion of new spending will occur during the next two years.
  • Spending on infrastructure would only amount to $18 billion per year in 2009 and 2010.
  • Even with an optimistic multiplier estimate of 1.5, the spending programs will only increase gross domestic product (GDP) about 1 percent per year above what it would be without the increased spending.

To be effective, spending must occur during the contraction, not after it (tax relief is different because it occurs as income is being earned), explains Scully.  For spending, infrastructure needs to be surveyed, engineered, contracted and built, a process that can take years, not months.  A cursory examination of federal budgets during the 14 contractions that occurred from 1929 to 2008 shows no relationship between deficit spending and the decline in industrial production. 

Most of the deficit spending that arose during these business cycles occurred after the economic recovery had begun.  In fact, if spending occurs toward the peak of a recovery, it can contribute to inflation, says Scully.

The current stimulus proposal is a government spending bill, with money for new or expanded programs planned for the future.  According to Scully, research shows that when government spending reaches 20 percent to 25 percent of GDP, it reduces the rate of economic growth.  As a result, increased spending will cause the budget deficit and government debt to rise.

Source: Gerald W. Scully, "Will the $800 Billion-Plus Stimulus Plan Bring Economic Recovery?" National Center for Policy Analysis, Brief Analysis No. 643, February 10, 2009.

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http://www.ncpa.org/pub/ba643/ 

 

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