A modest thought experiment: Here is a check for $858 billion. Your job is to boost short-term economic growth. What would you do with the money?
President Obama and a huge bipartisan majority of the Senate have given us their answer (and the House is likely to add its support tonight or tomorrow): They’d extend the Bush-era tax cuts, restore the estate tax but at an historically low level, cut payroll taxes for all, protect the middle-class from the Alternative Minimum Tax for another year, and continue jobless benefits for the long-term unemployed.
But upon closer inspection, very little of this massive increase in the deficit over the next few years will actually boost growth. If you care about the bang for the buck—and given our long-term fiscal mess, you should—this new law is a colossal waste of money. In fact, you'd be hard pressed to use $850 billion in a way that's less effective than much of what’s in this package.
By my rough calculations, more than half —at least $450 billion—will do little or nothing to boost the economy in the short run. It won’t increase demand for goods and services. It won’t increase investment. And it certainly won’t create many new jobs. It will, however, provide a fabulously generous tax windfall to those who need it least.
Would you, for instance, try to boost short-term growth by giving a few thousand super-rich estates a $70 billion tax cut? Or by continuing $55 billion in mostly dubious special interest tax breaks for NASCAR race track owners, Manhattan real estate developers, ethanol producers, and other worthies? How about giving $27 billion in tax cuts to married people for being married? Or slashing payroll taxes for all workers, including those making hundreds of thousands of dollars a year? The entire payroll tax cut will increase the national debt by $100 billion, and more than $3 billion will go to those making $500,000 or more (who get an average of more than $2,600 each).
That’s not to say the deal is all bad. I would include some bits in a serious stimulus bill. For instance, I would use low-income tax credits such as those in the 2009 stimulus bill to put cash in the pockets of people most likely to spend it. I’d also keep tax rates relatively low, especially for low- and middle-income families. But those provisions account for perhaps one-third of that $858 billion.
Obama, Senate GOP leader Mitch McConnell (R-KY) and other supporters of the plan argue, of course, that “doing nothing” would lead to economic disaster. No doubt simply letting all of the Bush era tax cuts die would take money out of people’s pockets in the midst of a soft economy, and that would be a bad thing.
But that’s the false choice into which Obama allowed himself to get shoved. How did it happen that President of the United States found himself with only two fiscal policy options: Extending a collection of decade-old tax cuts, or letting them die?
In a sane world, government would design economic stimulus that made sense on its own terms. It would ask the simple question: What taxes should we cut and what spending should we adjust to maximize economic growth and job creation? But that’s in some parallel universe, not in the Washington of 2010.
So hooray, we have bipartisan fiscal policy. But it is in large part a massive waste of scarce fiscal resources and nothing to be proud of.
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