Now, About That Stimulus Bill

As I understand them, the Republicans’ main reasons for opposing the stimulus bill (0 votes in the House, 3 in the Senate) were: (a) the bill contains too much evil government spending, (b) it doesn’t spend money fast enough to affect the economy, and (c) it’s too big. There are really no grounds for bipartisan agreement on (c), especially since many Democratic economists believe the stimulus is too small given the yawning output gap. But even conceding for a moment that (a) and (b) are valid concerns, I’m still baffled by the reduction of state aid from $79 billion to $40 billion. (See the New York Times comparison here.)

According to the Center on Budget and Policy Priorities, states are facing new budget shortfalls of $51 billion this fiscal year (ends June 30) and at least $94 billion for next fiscal year. Direct federal government aid to states will do no more than partially fill those budget gaps and enable state and local governments to keep people employed instead of firing them – teachers, firefighters, etc. While one might have concerns about whether the government can spend money on new programs efficiently, in this case the money will go to basic services that the government is already providing. This is only wasteful if you take the extreme view that all government spending in general is wasteful and any excuse to reduce it is a good one (the old “starve the beast” argument). The money can be spent quickly, because all the mechanisms needed to spend it already exist. Even if it is spent over several months (because people earn their salaries over the year), it will still have an immediate stimulative effect, because people who have jobs spend a lot more than people who don’t have jobs. It will have a high multiplier, because every dollar of government payrolls counts as one dollar of GDP, so the multiplier on government salaries is roughly the multiplier on tax cuts plus one. And it will even save a little money in unemployment benefits.

There are a lot of things one can argue about in the Senate version of the stimulus, but this I just don’t understand at all.


Originally published at the Baseline Scenario and reproduced here with the author’s permission.

2 Responses to "Now, About That Stimulus Bill"

  1. Guest   February 11, 2009 at 9:34 pm

    Ya right James. So taxpayers in relatively prudent states should subsidize the imprudent states such as California and New Jersey? While we’re at it let’s subsidize the purchase of a car and a house for someone. Let’s just, in a totally cavalier and idiotic fashion, warp any connection between responsible behavior and consequences.

  2. happytobefree   February 12, 2009 at 2:51 am

    having worked for government for two decades, let me state that government never saw a dollar it didn’t like. unfortunately, your analysis doesn’t include real life experience, only headline makers(“…firing them -teachers, firefighters, etc”)be sure that the teachers, firefighters and police are secure. the “etc” such as leisure services, enrichment liaisons and the like should not only be crimped but maybe discontinue altogether. when your in a financial jam, government should be no different then the normal household…should we pay the electric bill and buy groceries or go to the movies?