Tuesday, September 7, 2010

Stimulus Plan Repeats Last Year’s Mistakes

At first glance, the new stimulus plan proposed by the White House is ugly. The substance of it is a plan to spend $50 billion on infrastructure. That part, though poorly structured and poorly targeted, makes sense. But tacked on is $300 billion in business tax cuts. Ugly. If it takes $300 billion in giveaways to get $50 billion of stimulus spending through Congress, that’s even less efficient than last year’s package.

What does it mean for a stimulus package to be inefficient? In this case, the proposed spending is too small to lift the country out of the recession, but at the same time, the price tag is high enough to put the federal government’s fiscal integrity — and along with it, its credit rating — at risk.

The business tax breaks are supposed to encourage new spending by businesses, but in times like these, the only spending that will follow will be businesses paying tax accountants to rearrange their budgets so that something qualifies for the tax breaks. If a business were to be persuaded to spend on something new, this year or next, it would be some form of cost-cutting investment, which would lead to less spending in the long run.

I know, stimulus is the traditional strategy for getting the United States out of a recession. This is not an ordinary recession and stimulus cannot provide its usual effect. The errors in the economy need to be corrected before we can get it up to speed again.