The Idiot’s Guide to Porkulus

For those of us who like things spelled out nice and simple, Paul of Powerline usefully summarizes the main features of the House porkulus bill, based on a talk by John Cogan of the Hoover Institution:

According to Cogan, about 20 percent of the package consists of temporary tax cuts. These didn’t work when we tried them a year ago and aren’t likely to work now. The reason is that, in bad economic times, people tend not to spend money they receive on a one-time basis. Cogan presented charts showing how small an effect on consumption the 2008 tax rebates had.

Another 30 percent of the package will provide unemployment benefits and health insurance subsidies to individuals who are out of work. On the plus side, this money will serve humane purposes. On the minus side, it will reward idleness and possibly make employers less likely to lay off employees. From the standpoint of stimulus, though, Cogan concludes the effect will be minimal.

Another 20 percent or so of the package would go to education. This expenditure will not produce much economic stimulation because, by and large, it will not bring idle resources back into use. There aren’t many idle teachers, and idle construction workers (say) can’t be put to use as teachers.

Most of the remaining money, about 20 percent, would go to public works projects. This spending can certainly cause idle resources to be put to productive use. However, according to the Congressional Budget Office, only about 10 percent of this money (representing only 2 percent of the total package) will be spent in the first year, when we can be pretty confident it will be needed. Most of the money will be spent thereafter when, quite possibly, the economy will be on the road to recovery.

Cogan pointed to studies showing that, when public works spending was used to stimulate the economy during the 1974 recession, and previously in the very early 1970s, the money simply wasn’t spent fast enough to have the intended effect.

Thus, in all likelihood, the current Democratic package will have very little impact as a stimulus. This doesn’t mean the economy won’t recover—history establishes a strong presumption that this recession will end within the next year or two. In fact, no post-World War II recession has lasted more than two months longer than this one already has. Cogan’s point is that the Democrats’ stimulus package will probably have very little to do with the recovery.

But that doesn’t make the stimulus package irrelevant. To the contrary, its impact is likely to be substantial. That impact, however, will occur in the long term as result of unprecedented debt and the resulting pressure to increase taxes, including taxes on the middle class.

Posted by Lawrence Auster at February 10, 2009 11:20 PM | Send