Mo' Money, Mo' Problems: Some Experts Wary of Stimulus

Democrats are pushing a stimulus plan to revive the economy as soon as next week. But some experts warn that short-term injections of government spending, the kind that Democrats and even some Republicans are proposing, carry long-term risks and might not be effective.

Congress will likely reconvene next week to act on a stimulus package that jump starts the economy through spending mainly on infrastructure projects such as highway construction, water projects and modernization of public housing.
Congress Considering Second Stimulus Plan (Photo by Manuel Bewarder)

Meanwhile, experts underscored the current precarious economic situation and called for long-term solutions regarding the growing federal deficit.

“Congress should learn from its previous mistakes and not consider proposals that increase the debt and do little to stimulate the economy,” said Brian Riedl, a budget expert at the Heritage Foundation, a conservative think tank.

President-elect Barack Obama has called for a stimulus package that includes both infrastructure projects and tax cuts for the middle class. He said this would be one of his first accomplishments as president if Congress doesn’t act in next week’s lame-duck session.

Senate Republicans defeated the first attempt at the $61 billion stimulus package in late September.

Every dollar that the government invests into the economy must be taxed or borrowed, opponents of the stimulus proposal said.

“It’s nearly a redistribution of money form one group of people to another,” said Riedl, who spoke at a panel discussion sponsored by the New America Foundation earlier this week.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget at the New America Foundation, shared Riedl’s skepticism about whether a fiscal stimulus could effectively cure the ills of the economy.

“No stimulus package will be a magic bullet,” MacGuineas said. “Fundamental tax reforms, infrastructure and energy are growth programs, and they shouldn’t be kind of shoveled through in an emergency stimulus bill.”

MacGuineas urged lawmakers to think about national priorities and “how to shift our budget away from a consumption-oriented outdated budget into one that is more growth-oriented.”

At a House Transportation and Infrastructure Committee hearing two weeks ago, both lawmakers and witnesses had called for tens of billions of dollars for infrastructure projects to create jobs and strengthen the struggling economy.

“Every billion dollars in spending on infrastructure or on highway and transportation expenditures results in about 35,000 new jobs,” said ranking member Rep. John Mica, R-Fla., citing numbers from the Federal Highway Administration about the following creation of direct and indirect jobs.

If the infrastructure investments are in projects that could begin immediately, “this recovery package would provide a boost to the overall economy and stimulate jobs across industries and across the nation,” said John Irons, Research and Policy Director at the Economic Policy Institute.

In an earlier stimulus package, the government had released about $150 billion in tax rebates during the spring and summer. But with the economic crisis, the effects of the rebates vanished.

The U.S. economy has lost 1.2 million jobs this year through October, according to recent numbers from the Labor Department. The unemployment rate has risen to 6.5 percent, the highest level since 1994.

Video: The New America Foundation hosted a panel discussion "Recipes for Recovery" about the need for a second stimulus package.

“The next stimulus package will fail to rescue the economy just like the last emergency spending failed,” Riedl said.

Riedl also opposed more spending to fix the current problems.

“We should not focus on a short-term stimulus and push the deficit above a trillion dollars, but create a stronger economy over the long run and leave America better prepared to handle future economic downturns," Riedl said.

Despite concerns that a stimulus bill could be, to a large extent, about trading political favors, MacGuineas supported the stimulus package.

“There will be some benefit from boosting temporary demand, hoping to stem job loss,” MacGuineas said. “We’re certainly in a situation where we’re facing a real risk of an ongoing kind of downturn spiral."

“And I think it’s better to try to get out in front of this.”