Imaginary Savings, Imaginary Jobs


With a wary eye toward the 2010 elections, Democrats are starting to craft another stimulus package. This would seem incompatible with the administration’s reluctance to add to the deficit, but a rally in the stock market has enabled some banks to repay the money they took under TARP (Troubled Asset Relief Program). The plan, as articulated by Speaker Nancy Pelosi, is to use these funds to pay for a new “jobs bill,” which would look suspiciously like the $787 billion stimulus bill enacted just last February.

This morning at the Brookings Institution, President Obama is scheduled to lay out some of the things he’d like to see in this new jobs bill. He is expected to ask for more funding for transportation and “green energy” projects, as well as a tax credit for businesses that add to their payrolls. But he faces political headwinds: A solid majority of Americans – 62 percent, according to the latest NBC News–Wall Street Journal poll — favors keeping the deficit under control over taking further steps to boost the economy.

This is where the TARP repayments come in. The money coming back to Treasury has led it to downgrade estimated losses on the program, which in turn has led the administration to downgrade its estimate of this year’s deficit by $200 billion (from $1.5 trillion to $1.3 trillion). The Democrats would fund their new stimulus bill out of these “savings.” The bill would not, they claim, “add to the deficit.” This bit of gimmickry requires no further elucidation: To state it plainly is to illuminate its absurdity.

Putting deficit concerns aside, the recent decline in the unemployment rate has prompted doubts about the urgency of the jobs problem. But the Democrats’ preferred legislation would be unwise regardless of whether last month’s employment report was the start of an upward trend or a blip in a continued decline.

If we are entering a recovery (and it is still too early to tell), then increasing government borrowing is a terrible idea. The private sector will need that capital and would allocate it far more efficiently. How much more? Consider all of the strings attached to government funding. Road projects must clear numerous environmental hurdles; workers must be paid a prevailing (union) wage; and the money must be distributed evenly among the states to satisfy members of Congress, even though such conditions create a drag on the effectiveness of the spending. As always, the thing to understand is that stimulus bills are about building political capital, not real capital.

And what if November’s jobs report turns out to be aberrational, and the economy double-dips? The banking sector is still extremely fragile. Loan defaults continue apace. A sudden reversal in investor confidence would leave the nation’s financial sector tottering once more, and, regardless of whether it would be right to allow firms to re-tap the TARP, the political reality is that Treasury would probably intervene again to stabilize the system. In other words, it is far too early to start tallying up our TARP “savings” — we still have no idea how much the program will really cost.

Nor does the content of the Democrats’ proposals justify the risks associated with spending all of this money we don’t have. Transportation projects, for reasons stated above, are slow and inefficient vehicles for job-creation. And the Democrats’ latest green-energy craze — cash incentives for people to weatherize their homes — has an even worse track record. The last stimulus included $5 billion to “green” the homes of low-income families, but the money was immediately tied up in lawsuits when unions in several states sued for a bigger piece of the action. The GAO recently tried to study the effectiveness of this program, but 8 of the 14 states it examined still hadn’t spent a single dollar. Proposals floating around the capital would extend the program to all homeowners. They’re calling it Cash for Caulkers, and the name is apt: Like Cash for Clunkers, it would burn great chunks of borrowed money in the service of dubious environmental and economic goals.

In addition to these old stimulus throwbacks, the Democrats have proposed a new idea: Give businesses a tax credit for every new worker they hire. This is actually another old idea that was included in some versions of the last stimulus package before it was dropped over concerns that it would have numerous undesirable and unintended consequences. As economist Gary Becker has pointed out, the program would provide incentives for businesses to fire old workers and replace them with new, subsidized workers. A simpler way to reduce labor costs might involve a payroll-tax holiday, an idea that has drawn support from a diverse cast of thinkers, including some at Brookings.

All of this underscores a truth about the stimulus that Democrats seem reluctant to accept: Its hefty contribution to the deficit is not the only, or even the most important, reason it has grown so unpopular. Every day brings a new headline about how stimulus funds are being wasted or mismanaged, or how the jobs its supporters claim it has created are “not really a real number,” but more “like a budget number.” Opposition to the stimulus stems from the public’s growing awareness that it is being lied to, and that governments can only manipulate budget numbers up to a certain point before real bills start coming due.


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