Why the Stimulus Package May Be Too Weak to Fix the Economy

William A. Galston
Bill Galston
William A. Galston Ezra K. Zilkha Chair and Senior Fellow - Governance Studies

January 29, 2009

The Obama administration sought to promote three goals through the stimulus package: jump-start an immediate surge in consumer demand and job creation, make a down-payment on longer-term campaign promises, and initiate a new era of bipartisanship. On the last point, the bill’s failure to garner a single Republican vote in the House should convince the president that civility alone will not repair the breach. The White House hopes that a more inclusive process, which Senate rules all but guarantee, will produce a bill that some Republicans will see as more accommodating–and that the conference committee will lean toward the Senate’s version, giving the handful of remaining Republican moderates the ammunition they need to break ranks with their leaders. But recent public statements by the Speaker of the House and other Democratic leaders suggest that reducing political polarization is not as high on their agenda as it is on the president’s and that it may be hard for the administration to engineer a stimulus bill that is meaningfully bipartisan.

Politics aside–and rather chillingly–the tension between the bill’s short-term and long-term objectives may have produced a compromise that doesn’t promote either very well. Although nearly all the tax cuts would occur in fiscal years 2009-2011, they are not structured to produce much bang for the buck. History suggests that lump-sum cuts to individuals yield at least as much saving and debt reduction as new spending–admirable outcomes over the long haul, but not what the economy needs right now. The proposed business tax cuts are similarly flawed. Why not link tax cuts to consumer purchases and business investments that would actually stimulate the economy?

The spending side is a mixed bag as well. It is hard to fault the principle of direct aid to the states, whose constitutions would otherwise force them to cut spending and raise taxes substantially, hiking unemployment and offsetting stimulus at the federal level. According to the CBO’s January 26 analysis of the bill, nearly all the new budget authority for the states would spend out by the end of FY 2011. But this strategy, which used to be called countercyclical revenue sharing, would be more effective if linked to program reforms, especially in Medicaid and education. Evidently, though, haste precluded a serious consideration of structural change. 

Many of the other spending proposals take effect slowly over many years, muting their stimulative consequences. According to the CBO, only one third of the new budget authority for information infrastructure and energy conservation would be spent by the end of FY 2011, and only half in the areas of transportation, housing, and urban development. It is hard to argue with the argument advanced by many conservatives (and a handful of pro-defense Democrats) that if rapid spending and job creation are top priorities, the bill should have authorized far more than $5 billion for refurbishing the battered armed forces: About 80 percent of the new defense budget authority would be spent in the next 18 months. It might have been possible to link a large increase in defense refurbishment with cuts in outdated and unaffordable weapons systems–another reform road not taken. 

In the end, the president will almost certainly get his stimulus package, shorn of the most egregious line items, but with nearly $70 billion added for yet another short-term patch on the Alternative Minimum Tax–for a grand total of nearly $900 billion. It is a necessary victory in the here and now, but it may prove costly down the road. Because of the bill’s divided focus, its stimulative effects may prove too weak to halt or reverse more than a fraction of the job losses predicted for the next two years. And the investments, while relatively modest, may produce enough sticker shock to weaken support for the larger efforts the administration wants to mount in areas such as health care, energy, the environment, and infrastructure. It may prove difficult to turn off the spigot of “temporary” spending in 2011, as states and localities will still be struggling to recover from severe unemployment and steep revenue losses. If so, the consequence will be a permanently higher baseline budget at the very moment that the administration will want to pivot toward long-term restraint. The president may discover that once missed, a chance to invest in reform may be hard to reproduce–an ironic twist on his chief of staff’s instantly famous dictum linking crisis and opportunity.