8/25/10

Two dangerous Myths About the Economic Stimulus Package

PHILADELPHIA - MAY 8:  Economic stimulus check...Image by Getty Images via @daylife Here's a good read about the stimulus.

By Rex Nutting, MarketWatch

Commentary: We'd be in a much deeper hole without government's help

WASHINGTON (MarketWatch) -- We are in danger of making a dangerous U-turn on economic policy because our judgment is clouded by common misconceptions about the government's stimulus programs.

In some cases, Republican leaders have deliberately distorted some of these programs to spread doubts about the Democrats' policies. In other cases, urban myths have sprouted up without anyone deliberately fertilizing them.

Here are two of the worst misconceptions.

Myth 1: TARP and the stimulus are the same thing

Polls show that large number of Americans believe the economic stimulus plan from the Obama administration has failed because most of the money went to Wall Street banks, not to regular folk.

That's a myth. The stimulus gave no money to bankers. The TARP was not stimulus.

The Troubled Asset Relief Program was an $800 billion lending program to stop a run on the banks. The TARP was proposed by the Bush administration in September 2008. Among the Republicans who supported TARP were the four top Republicans in the Congress: John Boehner, Mitch McConnell, Eric Cantor and Jon Kyl.

The separate $787 billion stimulus plan was approved about four months later, in February 2009. Only three Republicans -- all senators -- voted in favor of the stimulus bill.

It may be that some of the mix-up about the two programs stems from the fact that both were $800 billion government plans. But they did very different things.

Most of the stimulus money was spent in four areas: 1) $288 billion in lower taxes for virtually all American families and most businesses; 2) $145 billion in investments in longer-term growth, such as bridges, roads, renewable energy, broadband, and information technology for health-care; 3) $144 billion in aid to state and local governments to prevent massive layoffs of essential workers, especially teachers and nurses; and 4) $82 billion for relief to the unemployed and the poor.

None of it went to banks.

Myth 2: Stimulus cannot stimulate

Republican leaders say stimulus is impossible, but that's not what they were saying in 2001, or 2002, or 2003, or 2008, when they supported tax cuts to stimulate demand.

For instance, here's what President George W. Bush said about his tax cuts in the early part of last decade: "I convinced the Congress to cut the taxes on the people, because I felt like, during this time of uncertainty and economic slowdown, if people had more of their own money, they would demand an additional good or a service, and in our marketplace, when that happens, a producer will produce that good or a service. And when that happens, the economy gets moving; somebody is more likely to find work."


That's pure Keynesian economics. He may have started out thinking tax cuts would work on the supply side, but at the end of the day, Bush argued that they would increase demand.

However, for Republicans, everything changed with Barack Obama's election, and they've spent the last 18 months chanting over and over that stimulus can't work, by definition. A sizable number of people now believe it. A majority of Americans tell pollsters that the stimulus did not help, and a sizable minority says it actually made the economy worse.

But it's not so. It's a myth.

Most independent experts -- including the Congressional Budget Office and conservative economists -- who've looked at it, agree with the White House that the economy would be much worse without the stimulus.

Here's how stimulus works in theory: In a recession, buyers take a holiday and businesses downsize. Consumers reduce their spending, and businesses lay off the workers who are no longer needed. Those layoffs reduce consumer spending even more, so more workers are laid off. Millions of people lose their jobs, and put their lives on hold.

Government stimulus is designed to inject money that will be spent quickly, thus keeping employment from falling further while we wait for consumers to be ready to spend again. It's supposed to fill in the gap temporarily, not be a permanent fixture.

Critics argue that government stimulus amounts to robbing Peter to pay Paul. The government crowds out spending and investment by the private sector, they say.

But that's also a myth. We are in a recession precisely because the private sector is not spending or investing. Every business owner says lack of customers is the big problem. And far from being monopolized by the government, capital is abundant. Big corporations, banks and investment funds are sitting on trillions of dollars, but have no productive place to put it to work. Because demand is weak.

But aren't we just burdening our children and grandchildren with debt? Yes, and no. The next generations will have to pay the interest on the debt, but they'll pay a lot of that interest to themselves as the owners of those bonds.

Of course, the same can be said for all other government programs. The Bush tax cuts added much more to the debt burden than the stimulus did. So do our wars in the Middle East. So does the deduction for mortgage-interest payments.

The question is whether there's a reasonable tradeoff between the costs and benefits of this spending.

Would anyone complain that their taxes are higher because we borrowed billions to defeat Adolf Hitler? Or that we borrowed to subsidize Grandma's blood pressure medicine? Or that we borrowed to dig ourselves out of the Great Recession a few years quicker?

No, because we know these expenses are worth it
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