A Bad but Necessary Stimulus Bill
The stimulus package is a terrible piece of necessary legislation.
Its flaws are gaudily obvious. The bill was written in monopartisan secrecy, weighed down by irrelevant spending, considered in a rushed, uninformed debate and passed on a virtually party-line vote. The law contains provisions that seem to weaken welfare reform and invite trade disputes. And it adds a massive burden of debt to existing massive entitlement obligations requiring massive borrowing from international sources -- or, if such credit dries up, the massive printing of money to buy these bonds, leading to inflation.
But while the legislation was deeply flawed, there was little alternative to action. The usual recession remedy -- the lowering of interest rates by the Federal Reserve to loosen up credit and spending -- is of little use when the credit system itself is broken and rates are already near zero. The president and Congress were left with one option: attempting a fiscal jolt to counter the economic cycle. Such efforts in the past have often been mistimed, with the cavalry arriving just after the settlers have been massacred. But one has to try. In this case, necessity was the mother of excess.
Beneath that excess, however, the stimulus does have a hidden virtue. A good portion of the funding is channeled to the poor through programs such as food stamps, unemployment insurance, the child tax credit and the earned-income tax credit. This has a humanitarian justification -- unskilled workers and minorities are hurt first and hardest by unemployment. But a focus on the poor has an additional economic justification. Dollars given to the middle class during uncertain economic times are likely to be saved -- particularly when the middle class calculates (not unreasonably) that current government largess may require future tax increases. Assistance provided to the poor, in contrast, is used immediately for necessities. The Congressional Budget Office calls spending on food stamps the most directly stimulative of fiscal policies. Helping the poor and stimulating the economy in a timely fashion are complementary goals.
Even here, however, the stimulus committed mistakes -- and missed opportunities for innovation. "The rush to push money out quickly," observes Philip Levy of the American Enterprise Institute, "left no time to develop creative new approaches."
Welfare is a prime example. Democrats, out of habit or conviction, fell back into old patterns in the stimulus package, providing states with an 80 percent subsidy to expand their welfare roles. Some argue that the broader, pre-reform safety net acted as an "automatic stabilizer," pumping funds into the economy during a recession without need for bothersome political decision making. By this logic, the most stable economy would have the poor on a universal dole.
But this, we know from experience, is no service to the poor themselves. Human beings are made for family, work and independence. The old welfare system was the swift solvent of all these commitments. There is a large difference between temporarily expanding food stamps and weakening the most successful, bipartisan policy reform of the past 15 years. We will not purchase economic stability with increased dependence -- and even if we could, it is unwise to trade the character of citizens for any economic benefit.
There are, in fact, creative new approaches rattling around the ideological spectrum -- programs to subsidize asset building among the needy instead of encouraging debt (a la Fannie Mae), to promote financial education, to give states more flexibility and resources in targeting help to low-income areas, to foster the transforming commitment of a father in the life of a child, to help with the reintegration of ex-prisoners into society, to make work pay, to broadly encourage charitable giving in a time of need. A strong list of 25 ideas was recently developed by the Poverty Forum (which, by way of disclosure, I helped to organize). This effort involved poverty experts from the left and the right defining areas of policy agreement -- a timely demonstration that such efforts are not futile. Many of the proposals set out an appealing ideal: the cooperation of government and civil society to serve and build a community.
I suspect that Congress will eventually be forced to reconsider its actions on welfare, which received little serious debate and no public attention. But Republicans and Democrats should be open to common-ground alternatives. On poverty, it is time for haste to yield to creativity.