February 11, 2009

Bigger Isn't Always Better

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Today the Senate passed its version of the stimulus bill. The House version of the American Recovery and Reinvestment Act has a price tag of about $820 billion while the Senate version stands at a total of $838 billion. Now the two versions will have to be reconciled and signed by President Obama. The ultimate goal of the stimulus legislation is to restore demand by replacing private spending with public spending and using tax cuts to hopefully restore consumers’ income enough to spur consumption. It is widely accepted that a stimulus bill is the proper means by which to improve the economy – it is perhaps the best of some bad options. Taking that into account, there are legitimate concerns about the current legislation.
While stimulus needs to be enacted quickly, it cannot be hasty as the risk of doing harm is greater than the chances of improving macroeconomic conditions. One goal of the legislation is to limit unemployment. This stimulus bill hopes to achieve this goal, in part, by spending on programs such as infrastructure (~$62 billion), health (~$140 billion) and energy independence (~$67.9 billion). These are all programs that can be beneficial in achieving long-term goals, but may not solve the immediate problems of unemployment and low demand.
Spending on the aforementioned industries, however, requires skilled labor. Unemployment in the healthcare sector, for example, is quite low. Government spending on healthcare in order to decrease unemployment may have little effect as it is not easy to teach a construction worker how to monitor a health IT system. It is not unlikely that the unintended consequence of simply shifting employment from privately funded healthcare companies to now government funded healthcare companies will occur, and that the ultimate goal of restoring unemployment broadly across the economy will not be realized.
Another worrisome component of the stimulus bill is the “Buy American” provision. The Senate has softened this part of the bill from the House version, but failed to pass Sen. McCain’s amendment to remove the “Buy American” provision. “Buy American” provisions, such as those imposed on steel in the House bill, are certainly understandable and may be a commonly held sentiment among the American people. Nonetheless, U.S. Senators are not supposed to blindly follow the wishes of their constituents, but rather use their judgment and knowledge to enact effective legislation. Any “Buy American” component of the stimulus bill will undoubtedly start a trade war in which other nations will respond by raising tariffs on U.S. exports. While a “Buy American” component to the stimulus bill may be a good public relations move in order to court voters, it will do little to nothing for the many low skilled unemployed workers who this piece of legislation is intended to help.
The hope with the American Recovery and Reinvestment Act is that a combination of government spending and tax cuts can restore demand to the economy and thus restore employment as well. Rather than just throwing money at the issue, policymakers must look at the long-term implications of this bill. There must be a balance between effectiveness and size, and the two are not always compatible. Regardless of whether one supports or opposes this legislation, the sincere hope of all Americans is that it works. In order to work, however, there must be transparency, oversight and a bit of luck.