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Keeping Our Eyes on the Real Ball



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The broad outlines, and few details, of a stimulus have been announced. The headlines focus on how much we will borrow to “stimulate” the economy–$789.5 billion. Remarkably, House Ways and Means Committee Chairman Charlie Rangel (D., NY) groused over the “cuts” that brought the total down below $800 billion. “Hardly anybody’s happy,” he said, “with having to go backward.” 

Go backward? Huh?

Over the last three weeks the policy experts at my institution, the Heritage Foundation, have published dozens of biting critiques of literally every aspect of the House and Senate versions of this legislative monstrosity. They agree on one thing: Under the guise of stimulating the economy, this one bill contains a generation’s worth of liberal policymaking, an entire Great Society-scale agenda, one that advances the liberals’ view of man and his relationship to government enough to cause LBJ himself to turn red with envy.

The pork and the overall spending are every bit as bad as the critics say, but in the long run, they are mere distractions. The real damage comes from other, less noticed provisions in the bills.

The House and/or Senate stimulus bills would undo the 1996 welfare reforms, explode entitlement spending by a cool quarter trillion dollars, lay the groundwork for the federal government’s takeover of our health care system, double Uncle Sam’s already overbearing role in education, require taxpayers to pick up the bail tab for potentially dangerous felons, allow unemployed Wall Street executives to qualify for Medicaid, and reignite the fires of trade protectionism, thereby risking a global trade war.  

Not bad for the first month of unified liberal rule in Washington, eh?

What follows is my attempt to cull together the most salient of these critiques as published on our web site. And these are just the serious concerns that have been uncovered thus far. The Lord only knows what other travesties remain to be found.

Here goes:

Reversing the 1996 Welfare Reforms

For the first time since 1996, the federal government would begin paying bonuses to states that increase their welfare caseloads. Under the stimulus bills, the federal government will pay 80 percent of cost for each new family that a state enrolls in welfare; this matching rate is far higher than it was under the old AFDC program.

The original goal of promoting employment and self-sufficiency and moving families off long-term dependence on government assistance has been replaced with the perverse incentive of adding more families to the welfare rolls. The House bill provides $4 billion per year to reward states to increase their TANF caseloads; the Senate bill follows the same policy but allocates less money.

For more information, please see the following WebMemo by Robert E. Rector and Katherine Bradley: “Stimulus Bill Abolishes Welfare Reform and Adds New Welfare Spending”.

Expanding the Welfare State

For the first time, the federal government will give significant cash to able-bodied adults without dependent children. A major new welfare program in the stimulus bill is Obama’s “Make Work Pay” refundable tax credit. This credit represents a fundamental shift in welfare policy. At a cost of around $23 billion per year, it will provide up to $400 in cash to low income adults who pay no income taxes. Since most of these individuals have little apparent need for assistance, the new credit represents “spreading the wealth” for its own sake.

There are six additional welfare expansions in the stimulus bill that will almost certainly become permanent if the bill is enacted. These include expansions to food stamps, the EITC, the refundable child credit, Medicaid eligibility standards, Pell grants, and Title I education grants. Added to the “Make Work Pay” refundable credit, the aggregate annual cost of these welfare expansions will be nearly $60 billion per year.

If these welfare expansions are made permanent–as history indicates they will–the welfare cost of the stimulus will rise another $523 billion over ten years. The total ten-year cost of welfare increases in the bill will not be $264 billion but $787 billion.

For more information, please see the following WebMemo by Robert E. Rector and Katherine Bradley: “Welfare Spendathon: House Stimulus Bill Will Cost Taxpayers $787 Billion in New Welfare Spending”.

The Stealth Health Care Agenda

The health provisions in the House stimulus bill would expand dependence on the already-unsound Medicaid entitlement program, distort health care choices for unemployed workers, and set up a federal infrastructure that could be used as a tool for government rationing of medical treatments, procedures, and services.

America is rushing toward the financial tipping point in health care–the point where the federal government controls more health care spending than will the private sector. Today, the government controls 46 percent of all health care spending, and its share is expected to reach 49 percent by 2017. According to the Congressional Budget Office, the sundry health provisions in the stimulus plan will draw an additional 8.2 million Americans dependent into the clutches of government-sponsored health care. In combination with the recent expansion of SCHIP, we likely have passed that tipping point.  

Specifically, the stimulus plan would:

·    Give every state a temporary, across-the-board increase in their federal match for Medicaid but do nothing to hold state officials accountable for their past management of their Medicaid programs.

·    Give unemployed workers 65% subsidies for their COBRA coverage. COBRA is a prohibitively costly option for the unemployed as well as taxpayers funding the subsidy.

·    The House bill goes even further, opening the Medicaid program to unemployed workers without health care coverage. The proposed expansion of the Medicaid entitlement program to new categories, regardless of income, further destabilizes the already troubled and poor-performing program.

·    The House and Senate bills would open the door to direct government intervention in the clinical decisions by physicians and other health care providers by establishing a framework and funding for comparative effectiveness research and health information technology.

·    While the Senate’s language is broad and vague, the House language provides further clarity. The House committee report states that “those [items] that are found to be less effective and in some cases, more expensive, will no longer be prescribed.” This type of alarming language is similar to what exists today in the British National Health Service.

·     In addition, billions of dollars would be spent on a health IT information “architecture” for exchanging information and training health care professionals. Combining the comparative effective research with the health IT portal opens the door to direct government intervention in the clinical decisions by physicians and other health care providers.

For more information, please see the following WebMemo by Nina Owcharenko “The Stimulus Bill: Why the Senate Must Fix the Health Care Provisions”.

Bailing Out Irresponsible State Governments

In response to pleading governors and mayors, the House stimulus bill contains a staggering $200 billion bailout for state and local governments that have spent themselves into deficit.

It is a shell game. Sending federal aid to states would not save taxpayers a dime, because state taxpayers are also federal taxpayers. Hiking federal taxes to keep state taxes from rising is like running up your Visa card to keep the MasterCard balance from rising. Either way, you will pay.

State balanced budget amendments are supposed to force states to budget responsibly. Bypassing those tough decisions through federal bailouts renders state balanced-budget amendments meaningless. Congress already sends $467 billion a year to state and local government–up 29 percent after inflation since 2000. And yet states keep responding to temporary revenue surges with permanent new spending programs.

·     Between 1994 and 2001, states flush with new revenues shunned rainy day funds and instead expanded their general fund budgets by 6.2 percent a year. The states demanded–and received–a $30 billion bailout from Washington in 2003.

·     After the 2003 bailout, states went right back to spending–with annual budget hikes averaging 7.2 percent over the next four years.

The biggest losers from a federal bailout are taxpayers who live in fiscally responsible states. They played by the rules and resisted extravagant new spending programs–and will be rewarded with higher taxes to bail out states that went on unaffordable spending sprees.

For more information, please see the following WebMemo by Brian Riedl “Stimulus Bill Should Not Bail Out Irresponsible States”.

Stimulus Bill Could Incite New Global Trade War

The stimulus packages in the House and Senate include expansions of “Buy American” provisions that discriminate against foreign goods and services in U.S. government procurement.

·    The House version would require that only iron and steel products made in America be used in the myriad public works projects funded in the stimulus package–unless domestic steel adds more than 25 percent to the cost of the project.

·     The Senate version is even more restrictive, banning the use of any import in stimulus-funded projects.

Regrettably, the cost of such protectionism will be inflicted on the American public, who will fail to get the best value for their hard-earned taxpayer dollars; the U.S. workers who lose their jobs when the companies they work for go out of business as countries retaliate in kind; and the economy as a whole, which will become less productive. The expansion of the Buy American program represents a step toward the same type of destructive protectionism instituted by the Smoot-Hawley tariffs of the 1920s.

For more information, please see the following WebMemo by Daniella Markheim “Buy American Hurts America”.

The Limits of Creating Jobs through Infrastructure Spending

Congress has included a little-known provision in the economic stimulus legislation that wastes tax dollars and costs jobs. All $188 billion worth of construction projects funded in the House version of the stimulus must pay Davis-Bacon prevailing wage rates. This requirement will inflate construction costs by $17 billion and depress the economy.

Contrary to its purpose, the Davis-Bacon Act distorts construction labor markets. Davis-Bacon wages bear little relation to market wages, because the government’s prevailing wage estimates are wildly inaccurate. Nationwide, Davis-Bacon rates average 22 percent above market wages and inflate the cost of federal construction by 10 percent.

For more information, please see the following WebMemo by James Sherk “Davis-Bacon Wage Provisions Depress the Economy”.

The infrastructure projects face three limitations: (1) the difficulty in getting such large, complicated projects up and running in a short period of time; (2) the tendency of many states to substitute federal for dedicated state money; and (3) the shortage of skilled labor needed to build them.

·     Both Presidents Hoover and Roosevelt implemented ambitious infrastructure programs in the aftermath of the stock market crash of late 1929, but nine years later the unemployment rate in the United States was still over 17 percent.

·     The Japanese government attempted to revive its economy through several infrastructure spending initiatives in the 1990s. None succeeded. Instead the Japanese economy has suffered from pervasive stagnation over the past decade and a half, and economic growth averaged only 0.6 percent per year since the early 1990s.

·     Numerous studies of post-World War II infrastructure spending stimulus schemes have concluded that the benefits of such programs are modest at best and largely ineffective, despite the vast financial resources applied to them.

·    There has been little mention of the obstacles posed by the shortage of skilled, heavy construction labor in the United States, where much of the American population manages to avoid the kind of outdoor, physical labor common to construction work. Increased infrastructure spending may lead to increased immigration, thereby leaving the existing domestic pool of unemployed workers unchanged.

For more information, please see the following WebMemo by Ronald D. Utt, Ph.D. “The Economic Stimulus Package and the Limits of Infrastructure Jobs Creation”.

300,000 Jobs for Illegal Immigrants?

While the House-passed stimulus bill contains explicit language to bar employment of illegal immigrants in these construction projects, the Senate bill deliberately omits this language. If the Senate version of the bill becomes law, a great number of the workers employed in government construction programs will likely be illegal immigrants. About one out of seven (or 15 percent) of workers employed in construction in the U.S. is an illegal immigrant.

At present, all federal employees are checked by the E-Verify system, but outside contractors receiving federal funds (such as construction firms) are not required to use the system. Requiring contractors receiving stimulus funds to use E-Verify will greatly reduce the probability that those funds will be used to employ illegal immigrants.

E-Verify is a real-time, web-based verification system run by the Department of Homeland Security and the Social Security Administration. E-Verify can determine with great accuracy the authenticity of the personal information and credentials offered by employees and new hires. Despite years of use and screenings of millions of employees, there has never been a single instance in which a lawful worker lost permanent employment as a result of erroneous information provided by the E-Verify system.

For more information, please see the following WebMemo by Robert E. Rector “Senate Stimulus Bill Would Provide 300,000 Jobs for Illegal Immigrants”.

Stimulus Funds will Be Used to Let Felons out of Jail

Both the House and Senate “stimulus” packages potentially include millions of taxpayer dollars for the release of felons before trial. Edward Byrne Memorial Justice Assistance Grant (JAG) Program grants can be used by state and local governments for 29 broad criminal justice purposes, including funding pretrial release agencies.

Compared to other types of pre-trial release, research indicates that private bond agents are more effective at ensuring defendants make their court appearances.

Byrne JAG grants may actually promote policies that jeopardize public safety.

For more information, please see the following WebMemo by David B. Muhlhausen, Ph.D. “Get Out of Jail Free: Why Byrne JAG Grants Should Not Be Part of Economic Stimulus Package”.

Unprecedented Expansion of the Federal Role in Education

The House version of the economic stimulus package includes at least $142 billion in new federal education funding over the next two years–nearly double the total out­lays of the U.S. Department of Education in 2007. This includes the creation of a $79 billion State Fiscal Stabilization Fund to assist state governments in providing public educa­tion and other services as well as signifi­cant increases for current and proposed federal programs for K-12, postsecondary, and early childhood education.

Current budget shortfalls follow years of regu­lar increases in state spending levels. Proposed budget cuts should be placed in the context of today’s historic levels of education spending. Per pupil expenditures in U.S. public schools have increased by 49 percent over the past 20 years after adjusting for inflation.

In fact, the proposed legislation would penalize states that choose to review their spending priorities and decrease education funding. The plan would require states to use funds to restore fiscal year (FY) 2008 funding levels in order to qualify for federal aid. At a time when many states should be reviewing their long-term spending commitments, the federal government would be pressuring them to do just the opposite.

A state bailout may create moral haz­ard for state governments: If states with the greatest budget challenges receive an extra share of stabiliza­tion funding, this effectively–and perversely– rewards irresponsible spenders and penalizes state governments that have budgeted wisely.

The proposed new spending includes a series of new regulations, including requirements that states meet federal goals for achieving equity in the distri­bution of high-quality teachers, develop new data systems, and reform assessment protocols for spe­cific student populations.

The stimulus plan also stipulates that no funds be used to provide financial assistance to students to attend private elementary and secondary schools. As states explore strategies to meet fiscal challenges and improve efficiency, school-choice policies offer an attractive solution. The proposed federal spending plan would needlessly prohibit states from using potential funds to offer parental choice in education.

For more information, please see the following WebMemo by Dan Lips “Ten Reasons Why the ‘Economic Stimulus’ Should Not Include Education Spending”.

Stimulus Bill Undermines Parental Rights

Buried in the economic stimulus legislation is a provision–Section 5004, “State Eligibility Option for Family Planning Services”–that undercuts parental authority and expands control of taxpayer dollars by family planning clinics.

Because the income of parents or even a spouse may not be counted in determining eligibility, states would have the option to “consider only the income of the applicant or recipient.” In other words, a child in a family at any income level may be eligible for free family-planning services. A child would be able to receive benefits through a “presumptive eligibility period” and beyond without parental knowledge that he or she applied for Medicaid.

Section 5004 creates a new eligibility group that would include college students, adults without children, and even adults in a household that has significant income but little or no income for the applicant. Moreover, applicants would not have to prove their citizenship before their “presumptive eligibility” is determined.

For more information, please see the following WebMemo by Dennis G. Smith “How the House Stimulus Bill Undercuts Parental Authority”.



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