Stealth Stimulus

National Review Online
Monday, February 08, 2010

With the prospects for their transformative health-care bill looking dimmer by the day, Democrats have retreated to familiar ground: Stimulus! The $787 billion stimulus passed last winter is working, Democrats contend, but not fast enough. We need another $100 billion or so to spend our way out of this recession. If this is the first you’re hearing of this new stimulus bill, don’t be alarmed. The word “stimulus” has disappeared from the Democrats’ vocabulary, perhaps because a large majority of Americans correctly believe most of the money in the first stimulus bill was wasted. They’re calling the new package a “jobs bill,” as if renaming the same policies will yield different results.

Our arguments against these policies have not changed. What has changed is the amount of empirical evidence that has accumulated in favor of our position. Both this stimulus bill and the last one can be divided into roughly four parts: unemployment relief, aid to state governments, public-works projects, and tax gimmicks. None of these has contributed significantly to the recovery, and the enormous deficits required to pay for them put future growth in jeopardy.

Extending the duration of subsidies to the unemployed is sometimes justified, depending on the severity of the recession. However, all aid comes with trade-offs, and continuous extensions of unemployment aid encourage some job-seekers to hold out as long as they qualify for such relief, waiting for better jobs than the ones they’re offered. Such workers are undoubtedly contributing to the swelling ranks of the long-term unemployed or quitting the job hunt altogether, and one reason the unemployment rate is dropping is that the population of active job-seekers is shrinking. The good news is that this de facto permanent unemployment entitlement is not being paid for with borrowed money; the bad news is that it’s being paid for through an increase in the unemployment-insurance payroll tax — a tax hike on hiring, in other words, one that the Obama administration’s latest budget would make permanent.

When the administration says that the previous stimulus bill “saved or created” nearly 2 million jobs, it is mostly talking about state-government employees it claims would have been laid off absent a massive transfer of federal dollars. These estimates are wildly overblown, assuming in some cases that state university systems would have laid off their entire work forces or that entire prison systems would have been shut down. The more likely scenario would have been the long-overdue right-sizing of state governments in places such as California and New York, where public-sector unions have a stranglehold on the fisc and no tolerance for budget cuts.

The public-works spending from the previous stimulus bill accounts for a much smaller share of the administration’s “jobs created or saved” tally (which, incidentally, it has abandoned in favor of “jobs funded,” in order to cut down on embarrassing headlines about stimulus recipients’ counting raises as “jobs saved”). There’s a reason for that: Public-works spending, particularly on transportation, is not a terribly efficient way to create jobs. A transportation project must clear numerous hurdles before it can proceed, and contractors must pay a “prevailing” union wage, limiting the number of workers they can hire. Unsurprisingly, the Associated Press concluded that the transportation spending from the previous stimulus “had no effect” on unemployment rates.

The tax rebates in the first stimulus bill mostly took the form of checks cut to taxpayers and at least had the effect of putting money in people’s pockets. For the new stimulus, however, the Democrats have seized upon a sillier tax gimmick: giving businesses a tax credit for every new worker they hire. Doing it that way leaves room for businesses to game the system to qualify for the credit without actually increasing their labor forces. Cutting payroll-tax rates would straightforwardly reduce the cost of each new worker, but, as we mentioned before, the administration is moving in the opposite direction on that front.

There are a few things that the administration could do right away to make the economic climate more conducive to hiring. It could drop its push for a national health-care system that would impose new taxes and higher premium costs on employers. It could announce that it will stop seeking to increase the cost of energy, either through cap-and-trade legislation or independent EPA action. And it could assuage fears of runaway deficits and price instability by announcing a serious plan to control spending. (The new stimulus bill would be exempt from the president’s vaunted “spending freeze,” which tells you all you need to know about the seriousness of that plan.)

Instead, Obama hopes the public will not notice that his new “jobs bill” is composed of the same policies that were in the old “stimulus package.” Senate Republicans should have better sense: They should unite in opposition to this folly, pointing out that it’s been tried, and that it’s time to try something else.