Freedomnomics

Article published Monday, January 19, 2009, at Fox News.

Whose Money Is It, Anyway?

By John R. Lott, Jr.

Barack Obama claims that the House of Representatives’ new stimulus plan is needed to save the economy. Democrats promise to be “creating or saving of four million jobs.” News media report in all seriousness: “The democrats vow no earmarks or special projects will be attached to the bill. The focus is on jobs.” Also "more than 90 percent of the jobs created are likely to be in the private sector."

Unfortunately, though, the $825 billion “stimulus” package has nothing to do with creating or saving jobs -- it has everything to do with moving jobs from industries that Democrats don’t like to industries that they do.

The “stimulus” package is just a wish list of every government program that liberal Democrats have long wanted. As Rahm Emanuel, Obama’s Chief of staff, announced after the election last fall: “Rule one: Never allow a crisis to go to waste. They are opportunities to do big things.”

From $300 million for increased teacher salaries to $50 million for the National Endowment for the Arts to $650 million for digital television conversion coupons to $1 billion to make sure that minorities are not undercounted in next year's census, one wonders by what economic logic these programs have to do with stimulus. The sheer size and scope of how the federal government will micromanage where money will be spent is breathtaking.

Suppose you want to help people out. You have two choices -- either give people the money and let them decide how to spend it or allow the money to be spent on only specific items. The Democrats, who have always favored micromanaging people's decisions, have brought it to new levels.

If you want to help, can’t you just give poor people the $650 million dollars, and let them decide what their most pressing needs are? Take TV. Maybe an individual wanted to spend the $50 it costs for the most basic boxes on something else. But sorry, they only get the government money if they use it to buy converter boxes. Because of the subsidy someone who might have been interested in buying a new digital TV, or heaven forbid a radio, might now decide that they will simply keep their old TV.

Will this create new spending? Is the point of the new $650 million for converter boxes to provide a shot in the arm for converter box makers? I am sure that this is one industry that everyone is worried about, right?

Look at the reported $170 billion that will go to state and local governments ($80 billion for education, $87 billion for Medicaid, and $3 billion for Medicaid regulatory initiatives). Even Democrats can’t argue with a straight face that this is some new emergency stimulus idea. The Wall Street Journal noted last week that “state aid has long been a priority” for Speaker Nancy Pelosi.

Of course, with her home state of California facing a $15 billion deficit this year and a $27 billion deficit next year, her position is understandable. But why should Americans in states that have managed their finances relatively well bail out Californians?

Over the last four years California’s budget grew from $105 billion to $145 billion. If their budget had simply grown only fast enough to offset inflation (10.3%) and the growth in population (4.65%), the current budget deficit would actually be a $9 billion surplus. California could then have used that surplus to more than cover what would have been a few billion dollar deficit next year. Would California really be that badly off if the state government spent as much per Californian after adjusting for inflation as it did in 2004?

Will the unemployment rate go up? Democrats seem to want to make sure that it does, at least this coming year. But they apparently feel differently about next year (when there is an election). While the stimulus package is over two years, there is one interesting part that isn't -- the $9 billion increase in the size of monthly unemployment benefits lasts only until December 2009. Of course, this last year we saw how unemployment jumped as soon as Democrats increased unemployment benefits in July. Is there anyone willing to bet that Democrats will not extend unemployment benefit through next year’s election?

The $275 billion tax cuts have nothing to do with stimulating economic activity. The Keynesian argument for $500 tax credits is that lower-income individuals spend a greater percentage of their income than higher income individuals.

But this is nonsense, because it views savings as the equivalent of putting money in your mattress. When people save, they leave money in their banks or money market accounts or buy stocks or bonds. The money doesn’t disappear; it is given to someone else who spends it. If you put your money in the bank, the bank loans it out. If the person who the bank loans the money to leaves some of that money in their bank account, that money is lent out.

This tax credit doesn’t generate new spending. Some people will get money that they wouldn’t have gotten previously, but others who would have gotten some loan won’t get it. No matter what, the money can’t be in two different places at the same time.

Even without the new stimulus plan, this year’s budget deficit was already scheduled to hit a record $1.2 trillion, 8.3% of GDP. This year the deficit seems destined to be twice as large a share of GDP as the largest deficits that we have seen since World War II. Indeed, it is twice as large a share of GDP as any of the federal deficits during the 1930s.

It would be nice if we had something useful to show for all this money in the end, but the government is going to be spending a lot of money on projects that people wouldn’t be spending their own money on. Ignoring this just makes us poorer. Possibly President Obama should take the hint.

*John Lott is the author of Freedomnomics and a senior research scientist at the University of Maryland.

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