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Debate: 2009 US economic stimulus

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Is the 2009 US economic stimulus package a good plan to end economic crisis?

Contents

Background

Toward the end of 2008 and in the beginning of 2009, the economy began to experience a massive economic recession. Multiple actions were taken to stimulate the economy in early 2008, late 2008, and at the beginning of 2009. In early February, the House of Representatives and Senate passed legislation on a roughly $800 billion stimulus package. This followed significant public debate on the legislation.

Many questions have framed the debate. Can the government stimulate the economy? Or, is the government incapable of successfully intervening and managing the economy? What does history, particularly surrounding the Great Depression and New Deal, about the capacity of large spending programs to help end recessions? Is the stimulus package the right size, or is it too large, or event too small? Is the emphasis in the stimulus on spending appropriate, or do tax cuts provide better stimulus? Are the right kinds of stimulus included in the package? Is it appropriate, for example, to have included some longer-term spending projects? Does the stimulus include too much "pork" and room for wasteful spending? What are the consequences of inaction? Would it result in the next depression? Or is the government powerless to help in any case? Might the stimulus actually make things worse by adding to the national debt? Is the Buy American provision appropriate, or will its "protectionist" elements exacerbate the recession?

Government stimulus: Is the government generally capable of stimulating the economy?

Pro

  • Large spending is right approach to stimulating US economy. Martin Feldstein. "Defense Spending Would Be Great Stimulus". Wall Street Journal. December 24, 2008 - "As President-elect Barack Obama and his economic advisers recognize, countering a deep economic recession requires an increase in government spending to offset the sharp decline in consumer outlays and business investment that is now under way. Without that rise in government spending, the economic downturn would be deeper and longer. Although tax cuts for individuals and businesses can help, government spending will have to do the heavy lifting."
  • Majority of economists believe government can stimulate economy. Eugene Robinson. "Roll over the Republicans". Real Clear Politics. February 10, 2009 - "Begin with the most fundamental question: Does the U.S. economy desperately need a massive stimulus, or not? There are economists who doubt it's possible for the government to effectively stimulate an economy of such size and complexity. Those economists, however, are in the minority. [...] The most respected economic wise men and women of both parties believe a huge stimulus is needed quickly to keep a dire economic situation from sinking into catastrophe."
Steven Pearlstein. "Wanted: Personal Economic Trainers. Apply at Capitol." Washington Post. February 6, 2009 - "Spending is stimulus, no matter what it's for and who does it. The best spending is that which creates jobs and economic activity now, has big payoffs later and disappears from future budgets."
  • Large stimulus is appropriate for large economic crisis Scot Lehigh. "A large stimulus bill for large problems". The Boston Globe. February 6, 2009 - "President Obama's call for a large stimulus plan is under assault by arguments as unpersuasive as they are uninformed. Is the stimulus plan large? Yes, and with good reason. Our economic problems are as well. With consumers poorer from $6 trillion in vanished housing wealth and $7 trillion in vaporized stock, we're set to suffer annual losses in overall economic activity of a trillion dollars this year and a trillion or more next year. It's not just consumer spending that has collapsed. Other traditional generators of economic growth - business investment, housing construction, and exports - are all anemic. You can trace the effects of the sharp economic contraction in frequent stories about massive layoffs. That leaves government spending as the nation's best hope for softening a major downturn. To address a projected loss of more than $2 trillion in economic activity, Congress is debating an overall stimulus package of $819 billion to $900 billion. Although those figures sound large, on a dollar-for-dollar basis they would plug less than half the growing hole in the economy. So the stimulus size is hardly excessive - and conservatives' calls for cutting it back make little sense."[1]
  • A successful stimulus can be achieved with proper oversight It is true that a stimulus plan could fail. But, it is also true that the right set of spending and management can procure strong stimulus. For example, it may be important to avoid no-bid contracts and ensure that spending programs are done with a proper dose of competition to ensure that money is used by the most qualified companies for the best results. Transparency and accountability are also important in ensuring that once a company has a contract, it implements is mandate well.


Con

  • Economic stimulus by government intervention always fails Robert Higgs. "Instead of stimulus, do nothing - seriously". Christian Science Monitor. February 9, 2009 - "Hardly anyone [...] is asking the most important question: Should the federal government be doing any of this? [...] the United States managed to navigate the first century and a half of its past - a time of phenomenal growth - without any substantial federal intervention to moderate economic booms and busts. Indeed, when the government did intervene actively, under Herbert Hoover and Franklin D. Roosevelt, the result was the Great Depression. [...] Until the 1930s, the Constitution served as a major constraint on federal economic interventionism. [...] Federal intervention rests on the presumption that officials know how to manage the economy and will use this knowledge effectively. This presumption always had a shaky foundation, and we have recently witnessed even more compelling evidence that the government simply does not know what it's doing. The big bailout bill enacted last October; the Federal Reserve's massive, frantic lending for many different purposes; and now the huge stimulus package all look like wild flailing - doing something mainly for the sake of being seen to be doing something - and, of course, enriching politically connected interests in the process."
  • Stimulus spending violates principles of supply-side economics Yaron Brook. "To Stimulate The Economy, Liberate It". Forbes. February 14th, 2008 - "While some in Washington are quibbling about the details of the economic stimulus package, nearly everyone agrees with its basic idea: that our ailing economy needs Uncle Sam to play doctor and hand out some $150 billion in consumer spending money. But this sort of government intervention is not the cure for our economic troubles. It is the cause. [...] To understand why, we must first recognize that the key economic activity that causes growth is not consumer spending but production. [...] Economic growth means an increase in the amount of wealth that exists in a country--and all wealth must be produced. Houses, health care, air-conditioning and transportation do not come ready-made from nature. We have them only to the extent that individuals and businesses bring them into existence. [...] The focus of today's stimulus packages on consumer spending is therefore completely backward. Consumption is a consequence of production. This fact is ignored by the Bush plan, which attempts to achieve prosperity through $100 billion in deficit-spending. Though this might bring the appearance of prosperity, in the same way that an unemployed man appears prosperous if he goes on a shopping spree with his credit cards, the reality will be the opposite."
  • Economic stimulus plan does not create any new demand. Brian Riedl, Heritage Foundation. "The Case for No Stimulus". National Review. February 3, 2009 - "That is a great question. The grand Keynesian myth is that you can spend money and thereby increase demand. And it’s a myth because Congress does not have a vault of money to distribute in the economy. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. You’re not creating new demand, you’re just transferring it from one group of people to another. If Washington borrows the money from domestic lenders, then investment spending falls, dollar for dollar. If they borrow the money from foreigners, say from China, then net exports drop dollar for dollar, because the balance of payments must adjust. Therefore, again, there is no net increase in aggregate demand. It just means that one group of people has $800 billion less to spend, and the government has $800 billion more to spend."
  • Stimulus is from taxes or debt; injects no new money Stimulus package spends money by first taxing it out of the economy or borrowing it through bonds. Either way, the money injected is not "new" money, but taken from the economy, so adds no new wealth to the economy.


Size: Is the size of the stimulus package appropriate?

Pro

  • Stimulus risks being too small not too large Robert Kuttner, co-editor of The American Prospect. - Stimulus "needs to be adequate to do the job. Eight hundred and twenty billion is about 2.5% of GDP. But the economy is sinking at the rate of five to six percent. So they may find out they have to come back and ask for more." Prominent economist Paul Krugman has also stated he believes that roughly $800b in economic stimulus is "too small".[2]
  • No evidence that stimulus supporters just want to grow government. While it may be true that some supporters of the stimulus have a hidden agenda to grow government, but this is mere speculation, and to oppose the legislation merely on this basis would be to overlook the broader, legitimate arguments involved in the debate.


Con

  • $800 billion stimulus is just too massive. A %800 billion stimulus package is the largest stimulus spending bill ever devised (although there have been some tax cuts that could be considered larger). For this reason, it should be viewed with great suspicion. It's just too large.
  • Any stimulus is probably inadequate to impact massive US economy. Eliot Spitzer. "Robots, Not Roads". Slate. Jan. 5, 2009 - "the capacity of even the U.S. government to affect the overall global economy is limited. Suppose the package is $800 billion over two years: $400 billion is less than 1 percent of the global economy and a mere 3 percent of the U.S. economy. In relative terms, $400 billion isn't all that much more than the $152 billion spent on the 2008 stimulus, which had nary an impact on the economy."
  • Stimulus will just be used to grow government bureaucracy. The spending in the stimulus will go toward many government programs, growing them so that they become a constant burden on tax payers and constraint for free markets. None of this is desirable, and this is why tax cuts are a better alternative; it provides stimulus without growing government, and in fact, shrinking government.


Spending vs. tax cuts: Which provides a better economic stimulus?

Pro


Con


Good/bad stimulus: Does the stimulus package contain mostly "good" stimulus?

Pro

  • Vast majority of stimulus bill is good stimulus. Jim Horney, director of federal fiscal policy for the Center on Budget and Policy Priorities - "The vast majority of what is in these two bills is pretty good stimulus."[5]
  • Funding new government jobs will stimulate the economy. Steven Pearlstein. "Wanted: Personal Economic Trainers. Apply at Capitol." Washington Post. February 6, 2009 - "And then there is Sen. Tom Coburn (R-Okla.), complaining in Wednesday's Wall Street Journal that of the 3 million jobs that the stimulus package might create or save, one in five will be government jobs, as if there is something inherently inferior or unsatisfactory about that. (Note to Coburn's political director: One in five workers in Oklahoma is employed by government.)"


Con

  • 2009 US stimulus has too much long-term spending/stimulus John Norquiest. "Stimulus to Nowhere". Planetizen. January 22, 2009 - "Spending projects will take years to get under-way. Is "Shovel-Ready" Enough? State bureaucracies claim to have thousands of "shovel-ready" projects. But examining the list of 'shovel ready' state projects at aashto.org you find a list of decades-old freeway expansion proposals, large-scale projects that according to FHWA estimates, only 27% will be under construction within a year . Intimately familiar with the realities of transportation funding deployment, the nonpartisan Congressional Budget Office offered cautionary advice to the Appropriations Committee on just this point."

Infrastructure: Is significant spending on infrastructure appropriate?

Pro

  • Stimulus wisely creates jobs to help fix/update roads. Timothy Bunn. "Why Obama's stimulus plan makes sense". The Post Standard, Syracuse. February 11, 2009 - "Let me try to help President Obama explain his stimulus plan: Yes, my stimulus is a program of big spending. But here's why it's good. When we spend to fix bridges, like the one that collapsed and killed 13 people in Minneapolis 18 months ago, for example, it's like fixing wiring in your house that's ready to burst into flames. Spending on infrastructure could prevent such disasters and put tradesmen to work. [...] When people like our bridge repairman have jobs, they earn money and spend it. [...] They spend it on the very things you provide where you work. And when they buy from your company, you keep your job. [...] If we don't spend for such things, the bridge repairman will be jobless. He'll collect unemployment from taxpayers like you. He won't get one of those tax cuts that Republicans in Congress love so dearly because he'd have no taxable income. And, he'd probably save as much as possible from his unemployment checks so he'd have something to live on after his unemployment runs out."


Con

  • US stimulus spends too much on roads and bridges Eliot Spitzer. "Robots, Not Roads". Slate. Jan. 5, 2009 - "The 'off the shelf' infrastructure projects that can be funded immediately and provide immediate demand-side stimulus are almost by definition not the transformative investments we really need. Paving roads, repairing bridges that need refurbishing, and accelerating existing projects are all good and necessary, but not transformative. These projects by and large are building or patching the same economy with the same flaws that got us where we are. Our concern should be that as we look for the next great infrastructure project to transform our economy, we might rebuild the Erie Canal and find ourselves a century behind technologically."


Consequences: What are the consequence of no stimulus?

Pro

  • US stimulus must be passed immediately to avoid greater crisis. "The US needs its stimulus now". Financial Times (Editorial). February 1, 2009 - "With the US economy shrinking at an accelerating rate, the case for a strong fiscal stimulus should be uncontroversial. Yet last week the House of Representatives passed its version of the measure sought by the Obama administration without a shred of Republican support. The Democratic majority in the Senate, which now takes up the legislation, is too small to assure passage without Republican votes. The bill can and should be improved – and some of the most needed changes might be to Republicans’ taste – but the greatest need is speed. [...] Even with prompt passage of the measure, according to the Congressional Budget Office, much less than $200bn of the $819bn in the plan would take effect in the remaining eight months of this fiscal year, which is when the stimulus is most needed. Delay in passing the bill beyond the middle of next month would be a grave setback. It is incumbent on Senate Republicans, especially, to avoid this."

Con

  • Allowing recession will enable stronger economic recovery Amity Shlaes. "Obama's gift to GOP is challenge to supply siders". Bloomberg. February 9, 2009 - "Cut the tax rate on capital gains to 5 percent. Halve the corporate tax rate. Fund a new, super-strong Securities and Exchange Commission to monitor anything that's traded, including the haziest derivative. [...] Buy homeowners out of mortgages they can't afford, and protect the rights of lenders. Make Social Security solvent by curtailing the annual growth in benefits. Forget one "S" word, stimulus, and learn to use two "R" words -- rent and recession. [...] Too costly, you might say, or too extreme. But the ideas above are neither costlier nor more extreme than the almost- trillion-dollar stimulus package moving through Congress. And they are more likely to bring long-term growth than the legislation advanced by President Barack Obama."
  • Stimulus may not work; an unacceptable gamble with $1 trillion. Martin Feldstein, chairman of the Council of Economic Advisors under Ronald Reagan, wrote in January 2009, "It is of course possible that the planned surge in government spending will fail. Two or three years from now we could be facing a level of unemployment that is higher than today and that shows no sign of coming down."[6]


Debt: Is adding to debt to stimulate the economy justified?

Pro

  • Adding to debt/deficit to fight recession is justified Martin Feldstein. "The case for fiscal stimulus in U.S." The Korea Herald. February 3, 2009 - "Under normal circumstances, I would oppose this rise in the budget deficit and the higher level of government spending. [...] Now, however, increased government spending and the resulting rise in the fiscal deficit are being justified as necessary to deal with the economic downturn - a sharp change from the reliance on monetary policy that was used to deal with previous recessions. Countercyclical fiscal policy had been largely discredited because of the delays involved in implementing fiscal changes and households` weak response to temporary tax cuts. By contrast, the central bank could lower interest rates rapidly, which worked to raise household and business spending through a variety of channels. [...] Nevertheless, I support the use of fiscal stimulus in the United States, because the current recession is much deeper than and different from previous downturns. Even with successful countercyclical policy, this recession is likely to last longer and be more damaging than any since the depression of the 1930s.[...] When the recession is over, the United States and virtually every other country will have substantially higher debt-to-GDP ratios. At that point, it will be important to develop policies to reduce gradually the relative level of government spending in order to shift to fiscal surpluses and reduce the debt burden."


Con

Christopher Grey. "Opinion: Why the Stimulus Will Fail". The Street. February 9, 2009 - "In fact, it will further destroy growth and jobs by fueling inflation and higher interest rates. The effect of the stimulus can be summarized best by reversing and paraphrasing Winston Churchill's famous statement regarding the Battle of Britain, 'Never in the field of human conflict was so much owed by so many to so few.'"
  • Spending and borrowing got US into crisis, won't get it out. Andrew Schiff, an investment consultant at Euro Pacific Capital said to Politico: "All this stimulus money is geared toward getting consumers spending and borrowing again. But spending and borrowing were the problem in the first place."[7]


New Deal: Did the New Deal end the Great Depression?

Pro

Click on the pencil icon and research and write arguments here





Con

  • The New Deal did little to nothing to end the Depression. James Glassman. "Stimulus: A History of Folly". Commentary Magazine. March 2009 - "Despite Franklin Roosevelt’s aggressive spending, unemployment reached 25 percent in 1933, fell only to 14 percent by 1937, and was back up to 19 percent in 1939.1 In the end, the New Deal did little or nothing to resuscitate the economy. Certainly, inept monetary policies helped prolong the Great Depression, as did tax increases, constant interventions in the conduct of business, and the erection of global trade barriers, beginning with the Smoot-Hawley Tariff in 1930, more than two years before Roosevelt took office. There was a stretch of twelve years from the stock-market crash to Pearl Harbor, and, during that time, fiscal stimulus simply did not jump-start the economy (or, in Keynes’s own metaphor, “awaken Sleeping Beauty”)."



Buy American: Is the "Buy American" provision justified?

Pro

Con

  • Buy American provision will cause protectionism and further harm "How to cause a depression". The Washington Times. February 8, 2009 - "Tucked within the economic stimulus bill the House passed last week was a clause requiring state and local public works agencies to buy American iron and steel for their reconstruction projects, and the Senate expanded it to all manufactured goods. It was modified slightly on Thursday as Senators had a second thought. If the nation is going to spend $43 billion to $100 billion on infrastructure revitalizing the civil engineering, architecture and construction industries, it sounded reasonable that the spending should also be used as a catalyst for other American products like U.S. Steel's steel, DuPont's plastics, 3M's chemicals and so on. But a brief history lesson will show them the folly of their ways.
In 1929, in an effort to stimulate the American economy after the stock market crashed, Sen. Reed Smoot and Rep. Willis Hawley, both Republicans, used similar logic to create the Smoot-Hawley Tariff Act, raising tariffs on foreign goods to record levels. President Herbert Hoover signed the bill against the opposition of more than 1,000 economists and numerous business executives. The result was a trade war with Europe, which increased its tariffs on U.S. products. Ultimately, U.S. exports and imports decreased by more than 50 percent in a single year, transforming the recession into the Great Depression (yes, the Mississippi Valley drought of 1930 helped, too). But at least Smoot-Hawley left open the freedom to import, whereas what the leadership of the 111th Congress originally wanted to eliminate imports outright."


Opinion: Where does public opinion stand?

Pro

  • Citizens voted for change reflected in 2009 US stimulus. President Barack Obama - "The notion that tax cuts alone will solve all our problems; that we can ignore fundamental challenges like energy independence and the high cost of health care, that we can somehow deal with this in piecemeal fashion and still expect our economy and our country to thrive. I reject those theories, and so did the American people when they went to the polls in November and voted resoundingly for change."[8]


Con

Pro/con sources

Pro


Con


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