Friday, February 6, 2009

Maybe the economic stimulus bill isn't such a good idea after all.

With all the haggling in Washington DC over the $800 to 900 billion stimulus bill, there isn't much discussion if any about whether it should be done at all. The debate is only over size and contents.

The Congressional Budget Office has now come out with a report suggesting the long run benefits may well not be there. A Washington Times news story notes:
CBO, the official scorekeepers for legislation, said the House and Senate bills will help in the short term but result in so much government debt that within a few years they would crowd out private investment, actually leading to a lower Gross Domestic Product over the next 10 years than if the government had done nothing.

CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net. [The House bill] would have similar long-run effects, CBO said in a letter to Sen. Judd Gregg, New Hampshire Republican, who was tapped by Mr. Obama on Tuesday to be Commerce Secretary.

The House last week passed a bill totaling about $820 billion while the Senate is working on a proposal reaching about $900 billion in spending increases and tax cuts.

But Republicans and some moderate Democrats have balked at the size of the bill and at some of the spending items included in it, arguing they won't produce immediate jobs, which is the stated goal of the bill.

The budget office had previously estimated service the debt due to the new spending could add hundreds of millions of dollars to the cost of the bill -- forcing the crowd-out.

CBOs basic assumption is that, in the long run, each dollar of additional debt crowds out about a third of a dollars worth of private domestic capital, CBO said in its letter.

CBO said there is no crowding out in the short term, so the plan would succeed in boosting growth in 2009 and 2010.

The agency projected the Senate bill would produce between 1.4 percent and 4.1 percent higher growth in 2009 than if there was no action. For 2010, the plan would boost growth by 1.2 percent to 3.6 percent.

CBO did project the bill would create jobs, though by 2011 the effects would be minuscule.

I've wondered whether in the long run the bill is a good idea because of the debt burden we'll adding and it's government generating the activity rather than the wealth creating private sector.

The stimulus bill debate seems to me to point out the current mentality of living for the now. Rather than planning for the future we're driven by quick fixes. That's what got us into this mess, e.g. enormous debt, making a quick buck and so forth. Trying to avoid the inevitable correction by pouring billions of new money generated by more debt seems to me to be going exactly the wrong direction. Eventually, somebody will have to pay the bill whether now or later. Ultimately, there's no such thing as a free lunch even when the government is involved.

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