Whiplash: Conservatives Play Politics with Stimulus Spending
C-SPAN viewers were at serious risk of whiplash last Wednesday night as they tried to follow the floor debate in the House of Representatives on President Obama’s economic recovery program. After bemoaning the fact for more than a week that too much of the money in the package was invested in programs such as highways, which spend too slowly to create jobs in a timely manner, conservatives first offered a substitute amendment that eliminated such funds and then almost immediately following the defeat of that substitute offered a second one that dramatically increased funding in the bill for both highways and civil construction in the Army Corps of Engineers.
In short, conservatives first argued passionately about how tax cuts had far more economic impact and created far more jobs than government spending, then they reversed field—doubling the proposed spending in the bill for highways and more than quintupling funding for the Corps. Appropriations Committee Ranking Member Jerry Lewis explained,
This motion funds high-priority, immediate job-producing activities like highway construction and the Army Corps of Engineers water projects. These are absolutely ‘‘shovel-ready’’ infrastructure investments that will put Americans back to work now.
Despite the blatant inconsistency between these two proposals the overwhelming majority of the 170 House members who voted for the first one also voted for the second.
The other remarkable feature of these two conservative policy alternatives? Despite the fact that their votes clearly went in opposite philosophical directions, they were virtually identical in the level of irresponsibility they displayed in offering a serious policy prescription to restore health to the U.S. economy.
The first proposal—offered by Rep. Dave Camp (R-MI)—was based on the proposition that analysis done by two of President Obama’s own economic advisors, Christina Romer and Jared Bernstein, showed, that tax cuts created far more jobs on a dollar-per-dollar basis and that the substitute would create twice as many jobs as the recovery package it would replace, despite the fact that it was only half the size. In other words the economic multiplier effect for tax cuts was approximately four times greater than the multiplier for increased spending.
If one goes to that analysis, however, there is clear evidence that exactly the opposite is the case. In the Appendix on page 12 of the Romer and Bernstein report a table is provided detailing the assumptions about the simulative impact of tax cuts and spending increases. The table shows the impact that a tax cut of 1 percent of gross domestic product ($140 billion) would have relative to the impact of a spending increase of the same size for each of the 16 quarters following the adoption of either a tax cut or spending increase.
In the first quarter the spending increase has an immediate impact roughly equal to the amount expended. The tax cut has no impact at all. In the second quarter the spending increase has a multiplier impact of 1.24 while the tax cut has an impact of only 0 .49. So six months after the effective date of either policy, tax cuts have only about 40 percent of the impact of spending increases. After two full years the impact of the tax cuts is about two-thirds that of spending increases. Yet Camp stated during the debate:
An analysis by President Obama’s nominated senior economic adviser…shows that tax cuts provide more immediate growth and job creation in the economy than does spending. So tax cuts provide a bigger bang for the buck… When the methods and economic models developed by the president’s top economic adviser are applied to the Republican plan, it shows the Republican plan could create as many as 6.2 million jobs over the next 2 years.
What the Romer analysis actually does show is that if you factor in the reduced size of the substitute with the lower stimulative impact of tax cuts, the number of new additional jobs created would decline from 3.9 million under the committee bill to about 1.3 million under the substitute. The Camp substitute would actually create fewer jobs than the economy has lost in just the last three months.
Romer is not alone in her pessimistic estimate of the weak impact that tax cuts have on a troubled economy. A number of private economic forecasting services have published estimates that are equally or in some instances even more pessimistic. Mark Zandi at Moody’s economy.com, for instance, published a paper earlier this month which estimates some tax cuts (such as reducing the corporate tax rate) provide a stimulus equal to or less than one-third of the size of the revenue lost through the tax cut, while some spending increases (higher food stamp benefits) provide a stimulus that is 70 percent greater than the size of the spending increase. In other words, spending increases can in some instances have five times the stimulative impact of tax cuts.
The second conservative substitute eliminated $104 billion in expenditures from the bill but replaced those with an additional $60 billion in funding for highways and the Corps of Engineers—$36 billion more for highways bringing the total to $66 billion, and $24 million more for the Corps of Engineers, bringing that total to $28.5 billion. Only 12 days earlier Rep. Jerry Lewis (R-CA) had issued a press release attacking the committee package with the argument:
Trade groups state that every $1 billion in highway “stimulus” can be spent creating 34,779 new construction jobs. But Congress must first borrow that $1 billion out of the private sector. The private sector then loses or forgoes roughly the same number of jobs.
Only a week before offering the substitute, Lewis attacked the committee product saying, “American workers and families are suffering now, but the bulk of the funding in this bill won’t be spent for YEARS.”
Among the biggest problems with the speed of government spending under the committee package, however, was the $30 billion it provided for highways and the $4.5 billion for the Corps of Engineers. The Congressional Budget Office estimated that only 10 percent of the highway money contained in the committee bill and just 25 percent of the Corps money would be spent in the first fiscal year. Further, CBO projected that 45 percent of the highway money and 16 percent of the Corps money would remain unexpended by the end of fiscal 2011.
In explaining their estimate, CBO argued that the amount contained in the committee bill would nearly double the recent funding levels:
Grantees would be required to move quickly to obligate the new funds (that is, commit them for specific projects). After obligation of funds, grantees would need to muster significant staff and private-sector resources to undertake the projects…Concerns exist about how quickly state and local governments can adjust their contracting procedures to accommodate the significant increase in funding…CBO concludes that…much of the construction and procurement…would occur over an extended period of time.
I disagree with CBO’s estimate of how quickly highway money would be spent under the committee proposal. It differs not only with the judgment of many state highway officials but with the organization’s own estimate last fall as to the speed at which highway funds are expended. Nonetheless, it is clear that CBO is correct in pointing out that there is finite capacity in state and local government and among private-sector contractors to build and repair bridges and highways.
Whether or not the $30 billion contained in the committee version of the stimulus exceeds that capacity is a question that can be debated by reasonable people. I believe there is a good chance that it does not. Whether an additional $36 billion could be absorbed by the system is not a matter on which reasonable people can debate. It is likely that a huge portion of that additional money would still be sitting in the Treasury well beyond the close of fiscal year 2011.
The convoluted and conflicting messages that conservatives presented in debate over the stimulus package on the House floor this past week convey more than just confusion on their part. Conservatives have an obligation to work with the incoming administration whenever there is an opportunity to do so but they also have an obligation to oppose policies that they find philosophically unacceptable. What conservatives demonstrated during this debate, however, was that they will adapt to whatever philosophy they find most tactically useful in blocking their political opponents. It is doubtful that either history or the American people will judge those efforts kindly.
Scott Lilly is a Senior Fellow at the Center for American Progress.
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