If the Economy is Growing Again, Do We Still Need the Stimulus?
As I'd been predicting for some time and the consensus of the political and economic world has now confirmed, the economy appears to have resumed a modest level of growth in the third quarter of this year (the quarter than began July.) Consumer spending and industrial production are up. Capital investment is back. The stock market has rebounded. And new unemployment claims are falling.
So, do we still need a stimulus?
First, let's review where we are.
As of the latest report from the government, here is where the provisions of the stimulus bill stand:
(1) Appropriations -- $499 billion total allocated
Authorized: $237.7 billion (47.6%)
Spent: $98.0 billion (19.6%)
(2) Tax Cuts -- $288 billion total allocated
Tax Relief Provided -- $62.5 billion (21.75)
In total, between the tax cuts and the outlays, $160.5 billion of the stimulus funds have been paid out, representing 20.4% of the amount authorized in the bill.
So, if the economy is recovering, do we really need to spend the other $626.5 billion? Would the money be better unspent to attempt to reduce the deficit.
Unequivocally, I believe that we must continue down the current path, for several reasons.
(1) Government Commitments
Projects which have been authorized but not spent would have a chilling impact if canceled. Private contractors have made hiring and investment decisions on the basis of these decisions and the government is obliged to honor them.
Similarly with the tax cuts, people have made decisions to buy homes, upgrade the energy efficiency of their homes, purchase automobiles and made financial decisions on the basis of the tax cuts in 2009 and 2010. Repealing them now would be operating in bad faith.
(2) Not Yet V-Shaped
Yes, growth has returned. But it is tenuous growth. The economy is clearly not booming and is in fragile shape. Pulling spending out of the stimulus is not the way to ensure that the economy finds firm footing.
(3) We Need to Do a Lot of This Anyway
The "emergency" provisions of the stimulus such as direct payments to states to cover shortfalls are already spent. Most of what is left is infrastructure spending including upgrading roads and bridges, green investment in government building and schools, computerizing government record-keeping systems and other investments, which, on balance are extremely good and needed things to do. Part of the complexity of the stimulus is that it wasn't just a direct infusion into the economy, it was kind of a roadmap for how we would upgrade productivity over the next decade. Not a bad thing to keep doing.
(4) It's Unemployment, Stupid
Unemployment still languishes at 9.7%, it's highest level since 1982. On of the major charges behind the stimulus bill was to contain unemployment. Sustained high unemployment damages consumer spending and confidence, and perhaps, just as importantly, is a major political problem for Democrats.
The American Recovery and Reinvestment Act was a massive expenditure at a time when the deficit was already projected to be at unsustainable levels. But it was a necessary short-term choice. In the near-term, the federal debt is not a big concern, Treasury Yields (the rate of interest the government has to pay to borrow) are at historical lows, meaning there is still plenty of liquidity to fund government operations.
We desperately need to get the deficit under control during President Obama's first term. But let's finish fixing the economy first -- ultimately economic growth leads to tax receipts, so if we don't fix the economy, nothing that we will do to fix the deficit will work.
Why Can't Congress Meet a Deadline?
In a continuation of a horrible legislative practice, it appears that we will likely see none of the major appropriations bills hit the President's desk by the time the new government fiscal year starts on October 1st. The cumbersome legislative process involved in annual appropriations involves both houses of congress passing a version of each appropriations bill, then a conference committee of Representatives and Senators compromising on the differences in the bills, a "conference report" that contains these agreements then being passed by both houses and the final appropriations bill signed by the President.
Over the past couple decades, the habit has been to pass budgets later and later in the fiscal year, using "continuing resolutions", partial funding for the functions of government for a short period of time, to bridge the gap.
This is understandable when power in Washington is split and Republicans and Democrats have to have tough negotiations to agree to spending priorities. In fact, for the fiscal year we are finishing, President Bush never signed budget bills -- this was left to the messy omnibus bill that President Obama signed that was widely criticized for being laden with pork.
There is no excuse with one party in control. It is simply dereliction of duty not to get budgeting done on time. Use of continuing resolutions is a poor practice because it leaves government agencies without spending priorities or an understanding of what programs will have continuing funding throughout the year. Below is the status of the bills. The Senate is really just getting into the debate, with the Transportation bill next on the docket. Looks like we will miss all the deadlines again.
Improved Access? Maybe. Improved Cost? Not So Much.
The very compromised Baucus Health Care Bill, which still appears to have zero GOP support, despite giving in on what looks to me like every major point (public option -- gone, protections against illegal immigrants -- in, spending -- reduced), will likely still help improve access to health care for Americans most at risk.
Eliminating exclusions for pre-existing conditions, prohibiting dropping insured people who are current on their premiums simply because they become sick and providing subsidies for those not poor enough for Medicaid but not rich enough to buy insurance on their own are all good things that will help improve access to our system.
But there is really very little in this bill that addresses the most dangerous part of health care in this country, it's very high and rising cost. There are many contributing factors to this, but here are what I consider to be the key ones:
(1) Perscription Drug Costs
No allowance to import drugs from Canada. No "most favored nation" clause, as I have suggested, for drug pricing. This looks like a giveaway to big Pharma -- more insured patients but no controls on what they can charge, even if it is many multiples of what they charge other industrialized nations that have government-run health insurance.
(2) Insurance Company Overhead and Profit
One in three healthcare dollars pays for insurance company overhead and profit. This spending adds zero value to the health care system. Medicare and Medicaid has less than a third of that overhead, as do nationalized healthcare systems. Without some provision to control the amount of money sucked out by insurance companies, we will continue to suffer from higher costs for care. Co-operatives may help some, but I doubt they are the full solution.
(3) Defensive Medicine
The GOP has this one right -- we need tort reform not just to reduce the cost of tort, but to reduce the prevalence of "defensive medicine" -- procedures that are likely unnecssary that are performed just to prevent a future law suit. Baucus is silent on this.
We may make a step forward on access, but I fear we are not going to make much progress on cost with this bill. Without reforms to cost, Medicare and Medicaid spending will cripple the government over the next 20 years. We will have to take it up eventually, but it looks increasingly unlikely that it will happen this year.
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