Posts Tagged ‘Stimulus Bill’

Paying for Stimulus II

President Obama unveiled his latest jobs plan before a joint session of Congress last night.  Click here to read the summary of the proposals included in the American Jobs Act.  Since many of the proposals are essentially the same as the $827 billion Stimulus Bill passed in February 2009, many people consider the recent proposal to be Stimulus II.

The debates and discussions about the effectiveness of such the programs can be tackled later.  In this article, I simply want to explore the way the government is going to pay for any new spending, should it pass Congress.

Although many of the details are still being hammered out, President Obama estimated the cost of his proposals to be $450 billion.  He expects to pay for the additional spending by closing corporate tax “loopholes” and raising taxes on wealthier Americans.  Closing loopholes usually involves minor tweaks to selected tax provisions, and typically don’t raise huge amounts of revenue.  For the past few months, President Obama has been touting the need to close a “loophole” for corporate jets.  The “loophole” is all about depreciation, which is merely a timing issue.  Jet owners will still get to depreciate their aircraft, but it will take a little longer.  The additional tax revenue from closing this “loophole” is estimated to be $3 billion, over ten years, or the equivalent of $300 million a year in additional revenue.

See the graph below of the total government revenues.  You’ll notice total tax revenues are approximately $2 trillion annually.  Thus, total tax collections would have to increase by nearly 25% to raise an additional $450 billion.  Congress will need to close a lot of “loopholes” and increase rates substantially to raise an additional $450 billion, which is extremely doubtful in the current political environment.

Although this may seem like simple arithmetic, but there is a twist.  You need to understand Washington code to decipher what President Obama really means.  Just like the $3 billion in savings from closing the corporate jet depreciation “loophole,”  the $450 billion will come trickling in over the next decade, not next year.

Members of Congress and the President frequently talk about the current budget and the 10-year budget horizon simultaneously and interchangeably.  It most applications, it means spending will be paid in the current year, and any additional revenues or spending cuts take place over the next decade.

Time will tell if I’m correct, but I expect the President wants us to borrow the $450 billion over the next 12 months in an attempt to spur economic growth and pay it back over the next decade.  Given our current economic situation, you may think this is a wise decision and/or necessary.  I’m not convinced.  With a $14.7 trillion debt, which is growing by $100 billion a month, I’m not sure adding another $450 billion is the best for our long-term financial future.

Before you decide if it’s a good idea or not, at least make sure you know what the President and Congress want to do.  Like so many other things in Washington, you may think they mean one thing, only to find out our leaders meant something else.

If anyone says the American Jobs Act will be fully paid for, check to see how and when.

Cost of a Job

What is the cost of a job?  Priceless… if you’re without one.

The American Recovery and Reinvestment Act of 2009 (a.k.a., the Recovery Act or the Stimulus), was enacted in February 2009 to create jobs and stimulate business investment in the recession which became severely pronounced at the end of 2008.  The original cost estimate was $787 billion. The most recent estimate is a $862 billion price tag.

President Obama and the supporters of the Stimulus argued that unemployment would exceed 9% without the Stimulus, but it would never be higher than 8% if the Stimulus was enacted.  Sadly, the unemployment rate reached 8.2% in February 2009, the month the Stimulus was passed, and exceeded 9% in May 2009. The rate has remained above 9% for over two years, except during February and March of 2011.

The Stimulus proponents have maintained that it was beneficial, and things would have been much worse without the Recovery Act.  This may be true, but it’s a difficult argument to make.

On July 1, 2011, the President’s Council of Economic Advisors released the most recent report on the progress and effect of the Recovery Act.  The report touted the Recovery Act’s success in creating or saving 3.6 million jobs.  Even if you accept the inclusion of a “saved job”, which is a controversial claim itself, the average cost per job is currently estimated to be $278,000.

The opponents of the Stimulus seized on this number to further criticize the Stimulus.  In their mind, the cost per job is highly excessive and is further proof of the government’s inability to spend money efficiently and effectively.  The White House argues the calculation was skewed, and the Recovery Act was intended to do much more than create jobs.

Despite all of the rhetoric coming from all sides of the political spectrum, the long-term benefits of the Recovery Act remain questionable.  One long-term effect is easily quantifiable – the additional debt incurred to fund the Recovery Act.  Since the government didn’t have $862 billion of extra cash on hand, we had to borrow it.  Thus, every American is responsible for an additional $3,800 of debt as a result of the Stimulus.

The effectiveness of the Stimulus may be debated a long time to come.  Whether we are better off or not, no one will ever truly know.  However, one thing is probably clear.  We’re not likely to see another $800 billion Stimulus Bill anytime soon.  With a $14 trillion debt, which is growing by over $3 billion per day, we simply can’t afford it.

If your job was created or saved as a result of the Stimulus, you probably think it was money well spent, although I doubt you actually got $278,000.  If you did, let us know how you achieved it.  Then again… maybe you better keep it to yourself.

The Cycle of Spending, Deficits and Bailouts

 As much as the economic recession has roiled the federal budget, it has taken its toll on state finances as well.  Reduced tax revenues and plummeting property values has made it difficult for state and local governments to balance their budgets.  One of the easiest ways to fill the state coffers is to look to the US Treasury.  After all… if Wall Street and the automakers got bailed out, why shouldn’t state governments get some help too?

Yesterday, Congress passed, and President Obama promptly signed the Education Jobs and Medicaid Assistance Act.  It provides $26 billion of federal funds to help states balance their budgets.  The law specifically allocates $10 billion for local schools to prevent layoffs of teachers.  Who can be against retaining teachers who help educate our children?

The current money is in addition to billions of dollars that was distributed to the states as part of the $787 billion Stimulus Bill, which passed less than 18 months ago.  The Stimulus funds helped states balance their budgets last year, but the continued languishing of the economy caused many states to need money again this year, so Congress came to the rescue.

The legislation sparked a little dustup in the State of Texas.  Rep. Lloyd Doggett accused Gov. Rick Perry of using $3.2 billion of Stimulus money to balance Texas’ budget, rather than increasing education spending.  Therefore, Rep. Doggett got an amendment included in the bill that requires Texas to certify that state education expenditures will remain at a certain level until 2013 in order to receive the new money.  The Governor responded that the Texas Constitution prevents him from committing to future state spending.

With an election only a few weeks away, politics are certainly at play in this issue.  Because of Texas’ population, there is $800 million at stake in this little tussle.  Despite the political rhetoric, it’s real money and will significantly affect education spending in the state.

Aside from an issue specifically affecting Texas and politics as usual, there is a bigger issue involved.  To me, the problem with the Doggett Amendment is the codification of the circular nature of spending, budget deficits and the need for more bailouts.  If Texas, or any other state, is unable to reduce education spending for the next 3 years, the ability to balance a budget becomes more difficult, exacerbating budget deficits, which casues the need for more stimulus/bailout money.

My primary complaint with the recent legislation is the way that states handled the original money from the Stimulus Bill.  Rather than using the money as a one-time gift which gave them time to figure out how to operate with less money, most states simply used the money to plug their current hole and avoided making difficult choices that would alienate their constituents.  The result…  a year later, they were back asking for more help. 

I wonder what state and local governments will do with the current money.  Do they see it as a bridge that helps them lessen the impact of altering future programs and services, or do they just plug another hole, spend the same money and be facing a similar crisis a year from now.

Everyone needs help and assistance from time to time.  In dealing with people, you have to be cautious that your help doesn’t enable them to continue their bad or destructive behavior.  Same goes for the government. Continually providing money to states to balance their budget, may prevent them from making the tough choices and decisions necessary to get them back on sound financial footing.

I’m sure Congress’ intent is to help, but it seems like they are beginning to enable the states to continue their spending ways and defer making substantive changes.  What do you think… is the government assistance helping or enabling?

An Unemployment Emergency?

In the past two days, Congress passed and President Obama signed a bill extending unemployment benefits.  The bill retroactively reinstated benefits which expired on June 1, and it extends them through November; just days after the 2010 mid-term elections.  Coincidence? No. Politics? Yes.

The legislation started out costing over $100 billion and got trimmed to $34 billion after eliminating the extension of certain tax benefits and additional money to help the states. The major political battle that’s been brewing for the past 8 weeks has focused on how to pay for the extension of benefits.  The proponents wanted to fund it with additional deficit spending, and the opponents to the legislation wanted to reallocate money from the $787 billion Stimulus Bill.  In the end, the proponents won out.

Aside from the question of how long should the government continue to extend benefits, the issue of how to pay for the benefits is a legitimate debate.   Although it’s political, it’s bigger than politics.

In February 2010, Congress passed a statutory Paygo rule.  Basically, it’s a self-imposed rule that Congress must pay for all future discretionary spending of the government (which only accounts for about 35% of all spending).  However, they gave themselves an out.  Emergency spending is exempt from the Paygo requirement.  Thus, the President and his supporters considered extending the benefits an emergency.  I disagree.

 An emergency is a sudden and unexpected situation or event.  Terrorist attacks, natural disasters and accidents are emergencies.  The unemployment situation when President Obama was inaugurated could have been considered an emergency, but that was 18 months ago.  The economic recovery remains very tenuous, but I don’t think we’re in a state of emergency. 

My opposition is not over the extension of the benefits.  My objection is Congress’ propensity of ignoring and rewriting laws, rules and regulations to avoid difficult decisions.  It is much easier to classify the extension of unemployment as an emergency, rather than make a politically unpopular choice of raising revenue or reducing other spending.  As a result, the red ink of the US government continues to flow unabated like the oil from an uncapped Macondo well.

In the big picture, $30 billion is a drop in the bucket.  We’ll rack up that much debt in the next 10 days.  So what’s the big deal then?  In principle, I agree with the controversial position Sen. Bunning took when he held up a similar extension bill back in February.  If Congress can’t find a way to pay for an additional $34 billion of spending, they will never make the tough decisions necessary to balance the budget.

I think Congress was right to extend the benefits, but I also think they should have found a way to pay for it.