Tuesday, January 20, 2009

The question IS whether government is too big or too small

I wasn't very impressed by Obama's inaugural speech. Too much gloom and doom, and a new role for government that is potentially boundless: "The question we ask today is not whether our government is too big or too small, but whether it works..."

As Congress works feverishly to pass a mega-stimulus bill, consider some simple facts which help to put the size of the proposed $800 billion stimulus bill in perspective:

From the Economic Report of the President for the current fiscal year:

Total Federal spending: $3,133 billion
–Defense: $682 billion
–International Affairs: $40 billion
–Health: $713 billion
–Income & Social Security: $1,087 billion
–Interest: $228 billion
–Other: $383 billion

Federal spending can also be broken down this way:

–Consumption expenditures: $954 billion
–Transfer payments: $1,795 billion
–Interest: $343 billion
–Subsidies: $48 billion

Fully 90% of the current federal budget ($2,820 billion) was projected to be spent on transfer payments (social security, welfare, health care, tax rebates, etc.), defense, and interest. That leaves $313 billion to be spent on mundane things such as the day-to-day operations of the government, schools, infrastructure, research grants, etc.

The Democrats' stimulus plan calls for spending some $500 billion or so on infrastructure, schools, research grants, etc. It's not unreasonable therefore to say that Obama's stimulus package calls for more than doubling the size of the federal government's spending on discretionary items. That is, on things other than transfer payments, defense, and interest. At the same time, he wants this all to happen very quickly.

It seems to me that this borders on the absurd. How can Washington double its discretionary spending in a matter of months without creating massive waste, inefficiency, and corruption? How can anyone in the Obama administration possibly know that all that money will be spent only on things that "work?" And if it takes years to spend most of the infrastructure money, as The Congressional Budget Office said today, how is that going to address the current crisis?

Above all, let's not forget that the whole notion of fiscal stimulus is deeply flawed. Some excerpts from a Chicago Tribune article are appropriate reminders:

John Cochrane, a professor at the University of Chicago Booth School of Business, says that among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is "taught only for its fallacies."

New York University economist Thomas Sargent agrees: "The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research."

I will be amazed if more than a fraction of the stimulus plan actually passes. I think that the more people realize the vast scope of the spending, and all the messy things it would entail, the less likely it will be to pass. The feeding frenzy alone could be very off-putting. By reaching way too far in his bid to radically expand the role of the federal government, Obama may find he ends up with very little. And fortunately, that would be a good thing.

UPDATE: Total corporate income taxes at the federal level are roughly $300 billion. Eliminating the corporate income tax entirely would "cost" much less than half of Obama's proposed stimulus (although corporate taxes foregone would be $300 billion, income taxes would likely rise due to increased employment). Most importantly, however, it would result in an instant stimulus; no need for anyone in Washington to try to guess what the best projects are out there. Plus, corporations that have stashed mountains of profits overseas might repatriate a good deal of that money.


Bob said...

You said, "How can anyone in the Obama administration possibly know that all that money will be spent only on things that "work?"

My answer, they don't. The Obama team's goal was to get elected. To do that they had to prey on the emotions of the electorate, not their reason. It worked, but now they will have come back to reason. I can't believe Team Obama is ignorant of past economic errors and would repeat those failed policies. They will have to throw the far left socialist base that supported them originally under the bus.

All JMHO of course.


Scott Grannis said...

Bob: I agree with you, and I really hope we're right.