Big stimulus bill sparks long-term fiscal fears

McClatchy NewspapersFebruary 23, 2009 

WASHINGTON — Despite all the White House hoopla Monday about "fiscal responsibility," Washington is showing little inclination to practice what it's preaching.

The $787 billion stimulus package that President Barack Obama signed Feb. 17 adds an estimated $185 billion to the already-record federal deficit for fiscal 2009, pushing it up to about $1.4 trillion. That's a whopping 10 percent of the gross domestic product, the highest level since the end of World War II.

The measure's full of projects that Democrats, who are in charge of the legislative and executive branches for the first time since 1994, have sought for years, and it's questionable whether many of those provide the economy much of a short-term boost.

Even more such projects are included in the next round of legislation, a $410 billion spending plan for the rest of fiscal 2009 that the House of Representatives is to consider Wednesday.

That package would spend about 8 percent more than the same programs got last year, the second biggest annual increase since 1978 for discretionary spending, programs that the government isn't required to fund, unlike Social Security and Medicare.

The White House message Monday at the fiscal meeting, which included experts from the political, academic and economic worlds, was one of hope.

"As we take the steps that we must to get through the crisis we're in now, we will not lose sight of the long term," Vice President Joe Biden said.

Obama pledged to cut the deficit in half by the end of his first term, but he's counting on the stimulus to get the economy growing again soon, and some experts call that a risky bet.

"This really doesn't do much to juice the economy in the short term," said Brian Bethune, the chief U.S. financial economist at IHS Global Insight, an economic consulting firm in Lexington, Mass.

The nonpartisan Congressional Budget Office agreed. It found that only 23 percent of the stimulus would be spent by Oct. 1, growing to 74 percent by the end of fiscal 2010 a year later.

The most immediate stimulus will come as tax relief, notably the $400 annual reduction in payroll taxes for most taxpayers, as well as extra unemployment benefits and help for states with Medicaid expenses, the health-care program for poor people and those with disabilities.

Obama also called Monday for pay-as-you-go spending, to avoid having new programs swell the deficits, but the legislation that the House will consider Wednesday eschews that approach.

Most government programs will run out of money March 6 unless Congress acts.

House Speaker Nancy Pelosi, D-Calif., on Monday defended the coming spending spree, which includes an estimated 9,000 earmarks, or local projects, said to cost about $5 billion. She called the bill "the unfinished business of last year, when the president refused to address the priorities and needs of the American people."

Democrats have been awash recently in unfinished fiscal business. Last year, for instance, President George W. Bush wanted to end or cut back several law-enforcement grant programs as well as spend less on the environment, health, labor and education than Democrats wanted.

The stimulus included $2.7 billion for seven major justice grants, including the Byrne Grants, which state and local governments use for crime-fighting strategies.

Democrats also got a long list of other projects into the bill whose stimulative effects have been questioned, including $50 million for the National Endowment for the Arts, $165 million for "critical deferred maintenance" at wildlife refuges and fish hatcheries, $200 million for the Department of Homeland Security to relocate its headquarters and $300 million so that the government can buy more fuel-efficient vehicles.

Some experts maintain that all the spending is easily justified.

"You're adding $787 billion to the economy that wouldn't otherwise be there," said Stan Collender, a veteran Washington budget analyst.

Critics counter that too much of the stimulus is unfocused. Independent analysts had two other concerns.

First, they said, the stimulus, as well as the fiscal 2009 budget legislation, may not provide the psychological boost the economy needs. The bills are too difficult for the public to grasp, because they have so many ways of stimulating the economy and the aid isn't clearly visible. Then too, the stimulus' costliest tax break, the $400 annual rebate, Bethune said, "is pretty minimal," since it will add only about $13 a week to most paychecks.

The next biggest tax break, a $70 billion patch in the alternative minimum tax, is "a phantom," he said, since it simply wipes off the books an increase that people will never see. Economists agree: That one's not stimulative. Congress passes it every year; Democrats just loaded it into the stimulus bill to get it out of the way.

The other problem involves the view that Washington isn't being fiscally responsible long term by focusing so much on the near term. The CBO warns that while the stimulus should boost the gross domestic product by 1.4 percent to 3.8 percent this year and 1.1 percent to 3.3 percent next year, long-term uncertainties loom.

The CBO projects that the GDP in 2015 and beyond will be as much as 0.2 percent smaller than it would have been without the stimulus package, dragged down by financing all the debt that's being piled up. In addition, noted the Committee for a Responsible Federal Budget, a bipartisan fiscal research group, the bill will "have a permanent impact on the deficit through higher interest payments on additional public debt."

As Kenneth Thomas, a lecturer in finance at the Wharton School of the University of Pennsylvania, put it, "There's going to be collateral damage. But now the goal is just to put out the fire."

ON THE WEB

Fiscal 2009 spending bill text

Congressional Budget Office analysis of long-term impact of stimulus

CBO analysis of short-term impact of stimulus

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