"An $800 Billion Mistake"

Martin Feldstein–despite his credentials as a conservative economist–has gone on record as supporting a stimulus package (his was for defense spending). I imagine that he might have been amenable to suggestion from the Obama Administration that some kind of Keynesian stimulus might be necessary to address the current economic downturn.

But Feldstein’s reaction to the bill passed yesterday by the House is . . . well . . . take a look:

Start with the tax side. The plan is to give a tax cut of $500 a year for two years to each employed person. That’s not a good way to increase consumer spending. Experience shows that the money from such temporary, lump-sum tax cuts is largely saved or used to pay down debt. Only about 15 percent of last year’s tax rebates led to additional spending.

The proposed business tax cuts are also likely to do little to increase business investment and employment. The extended loss “carrybacks” are primarily lump-sum payments to selected companies. The bonus depreciation plan would do little to raise capital spending in the current environment of weak demand because the tax benefits in the early years would be recaptured later.

Instead, the tax changes should focus on providing incentives to households and businesses to increase current spending. Why not a temporary refundable tax credit to households that purchase cars or other major consumer durables, analogous to the investment tax credit for businesses? Or a temporary tax credit for home improvements? In that way, the same total tax reduction could produce much more spending and employment.

[. . .]

On the spending side, the stimulus package is full of well-intended items that, unfortunately, are not likely to do much for employment. Computerizing the medical records of every American over the next five years is desirable, but it is not a cost-effective way to create jobs. Has anyone gone through the (long) list of proposed appropriations and asked how many jobs each would create per dollar of increased national debt?

The largest proposed outlays amount to just writing unrestricted checks to state governments. Nearly $100 billion would result from increasing the “Medicaid matching rate,” a technique for reducing states’ Medicaid costs to free up state money for spending on anything governors and state legislators want. An additional $80 billion would be given out for “state fiscal relief.” Will these vast sums actually lead to additional spending, or will they merely finance state transfer payments or relieve state governments of the need for temporary tax hikes or bond issues?

Be sure to read the whole thing. It’s clear the stimulus package is badly designed. Its tax breaks are paltry and its efforts at job creation are half-hearted at best. It’s a dog’s breakfast of an economic program and while public support for the stimulus plan was, at one point, quite high, it appears to have softened rather significantly recently.

Who knows? Maybe this means that the general public is catching on. It wouldn’t be the first time the American populace smoked out the vast amounts of funny business that is hidden in so much of our legislation.