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Wednesday, January 21, 2009

The Congressional Budget Office' Troubling Analysis

According to Bloomberg, the CBO has made a very troubling analysis of the stimulus package that Obama and the Democratic Congress are circulating.

The government wouldn’t be able to spend at least one-fourth of a proposed $825 billion economic stimulus plan until after 2010, according to a new report that suggests it may take longer than expected to boost the economy.

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About $103 billion would be spent in 2011, while $53 billion would be spent in 2012 and $63 billion between 2013 and 2019, the report said. Republicans said the analysis showed that the plan, unveiled last week by House Democrats, won’t get money into the economy quickly enough.

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The report said less than $5 billion of the $30 billion set aside for highway spending would be spent within the next two years. About $2.6 billion of $18.5 billion for renewable energy programs would be spent by then. About $907 million of a $6 billion plan to expand broadband access in rural and other underserved areas would be spent by 2011, CBO said.


In my analysis of the debate between monetary versus fiscal policy I pointed out that one of the biggest drawbacks of fiscal policy is that it takes too long to implement. That's especially true for government spending. If this analysis is true, then its findings are not only shocking but should immediately open up a serious debate over the future of this stimulus.

If most of this money isn't even going to be spent until 2011, then it will have almost no effect on the economy until then. In the meantime, the economy will fall further and further into a recession. What's more, if most of the money isn't even going to be spent until 2011, then why is there such a rush to pass the stimulus bill? Barack Obama would have us believe that it is vital to have a bill on his desk in a month even though most of the bill won't be spent for three years.

There is an even more troubling aspect that isn't being discussed. If the money won't be spent for three years and more, when will it be borrowed. Since it will be spent at different times, it's possible that it will all be borrowed up front. If that is the case, this stimulus will be mostly contractionary. Think about this. Let's say most of the nearly one trillion Dollars is borrowed up front and then held on the sidelines while the money is distributed. In that case, all the money that folks from around the country and the world will be taken out of the economy to buy these bonds. In the meantime, most of it won't be spent for years. Nearly one trillion taken out only to be spent years later is contractionary and very contractionary. That's the worst thing we could do right now.

In fact, one aspect of TARP that is not discussed is this exact phenomenon. So far, $700 billion has been allocated but only half spent. That means that the federal government issued and received $350 billion in U.S. Treasury bonds that it has not spent yet. Of course, whoever bought those bonds no longer has that money available. As such, for the last three months, about $350 billion has actually been removed from the economy. How does that help? It appears that the stimulus will have a similar effect only it will be greater sums with much larger time frames.

Most troubling is what David Obey said about all of this.

House Appropriations Committee Chairman David Obey, a Wisconsin Democrat, said last week that while lawmakers looked for programs that could be implemented quickly, they didn’t focus exclusively on “shovel-ready” projects because they also wanted the stimulus plan to address longer-term problems.

Yet, this is supposed to be an ECONOMIC STIMULUS plan. That is the first, second and third priority. If you are to believe Obey, that is only one priority and just as important is addressing the long term needs of the country. That sounds a lot more like big government nanny state. If that's what the Democrats want so be it, but it is terribly cynical and dishonest to dress up their intentions as "stimulus". If the goal is to stimulate the economy, then the money needs to be spent immediately. If the goal is for the government to expand exponentially so that infrastructure, green, and alternative energy needs are met, then call a spade a spade.

Given this very troubling news, we need a serious debate on this stimulus. Furthermore, given that most of this money isn't going to be spent for years, any further rhetoric about needing a bill right away is cynical, disingenuous and dishonest.

2 comments:

Anonymous said...

And yet if they just give us all of that money in the way of tax cuts or even rebates, the money will be spent right away.

But then they lose control, so never mind.

Anonymous said...

The high cost of fuel this past year did serious damage to our economy and society. After a brief reprieve gas prices are inching back up again. Our nation should not allow other nations to have such power over us and our economy . We have so much available to us in the way of technology and free sources of energy. WE seriously need to get on with becoming an energy independent nation. We are spending billions upon billions in bail out dollars. Why not spend some of those billions in getting alternative energy projects set up. We could create clean cheap energy, millions of badly needed new green jobs and lessen our dependence on foreign oil all in one fell swoop. I just read an eye opening book by Jeff Wilson called The Manhattan Project of 2009. It would cost the equivalent of 60 cents per gallon to drive and charge an electric car.If all gasoline cars, trucks, and SUV's instead had plug-in electric drive trains, the amount of electricity needed to replace gasoline is about equal to the estimated wind energy potential of the state of North Dakota. Why don't we use some of the billions in bail out money to bail us out of our dependence on foreign oil? This past year the high cost of fuel so seriously damaged our economy and society that the ripple effects will be felt for years to come. www.themanhattanprojectof2009.com