This above chart vividly demonstrates the enormous debt problem our nation will be encountering in the years ahead, and it is an example of why the current legislation has succeeded in stimulating taxpayer anger. The chart was developed by Greg Mankiw, Ph.D., of the Harvard economics faculty. He previously served as Chairman of the Council of Economic Advisers during the Bush Administration.
The major news outlets are incorrect in saying the stimulus bill has a meager $789 billion price tag, and according to Mankiw it will be far higher. The Congressional Budget Office says the true cost of the stimulus is $3.27 trillion over ten years, and 100% of this money for the stimulus is borrowed. The bill gives American workers $13 a week in their paychecks in exchange for passing along a $1 trillion debt to their grandchildren.
Spending for the entire New Deal in today’s dollars is only half of what this one bill costs. The New Deal equaled no more that 2 percent of the nation’s gross domestic product while the stimulus is over 5 percent, and this is just the beginning of the Obama expenditures. The Chairman of the House Appropriations Committee, Rep. David Obey (D-WI), acknowledged this by saying “The bill is the largest change in domestic policy since the 1930s.”
There is an excellent case for a stimulus and this was acknowledged by both parties. With the markets functioning so poorly, the government is seen as the only game in town capable of jump-starting the economy. A stimulus is both necessary and appropriate. However, many lawmakers also believe this bill is not the proper road to recovery. Tax relief for individuals and small businesses would have have doubled the number of new jobs created at half the cost. Less than a third of the American Recovery and Reinvestment Act meets the definition of stimulus — namely, that it is timely, targeted and temporary.
To many the bill appears to be 25 years of government spending proposals jammed into one bill and labeled stimulus. That is why not one House Republican voted for it. Despite repeated requests, the bill was not even posted on line for 48 hours prior to the vote. No one knew the details of what they were voting on, and very few lawmakers believe this will be a temporary program. There’s also the problem of time. Much of the stimulus is to be spread over a two-year period or longer — and 2009 looks increasingly bleak. During the debate several lawmakers wisely noted that it took 230 years to get to $5 trillion in debt, and just another 8 to double it.
There is little evidence any stimulus package during the past 80 years has jolted economic growth. It did not work for FDR in combating the Great Depression, Japan’s massive spending only resulted in 13 years of recession beginning in the 1990s, and George W. Bush’s initiatives in 2001 and 2008 were not successful. As Amity Shales says in “The Forgotten Man,” “The evidence suggests spending packages actually prolong the misery.”
In his testimony on Capitol Hill this week, Treasury Secretary Tim Geithner said he is delaying his proposal until he gets everything right. That is a wise move because there can be unintended consequences with even good ideas. As the chart demonstrates, we had an outstanding stimulus beginning in 1997 when Bill Clinton signed legislation lowering capital gains rates from 28 to 20%. Clinton first advocated this before the 1996 Democratic Convention, “Tonight, I propose a new tax cut for homeownership that says to every middle-income working families in this country, if you sell your home, you will not have to pay a capital gains tax on it ever — not ever.”
This gave people a new incentive to plow more money into real estate, and by favoring this sector, the tax code pushed many Americans to begin thinking of their houses more as an investment than as a place to live. Combined with the mortgage-interest deduction the law gave people a motive to buy more real estate. Lax lending standards and low interest rates gave them the means to do so.