Why the stimulus package is smaller than it may appear
President Obama convenes a summit today to hear from a range of interested parties how he can goose the American economy to create more jobs. Yet, for weeks, virtually every White House employee with the power of speech has made clear that the president doesn't intend to increase the deficit, and that the idea of a second stimulus is a non-starter.
Boosting the economy without increasing government spending on jobs is squaring a circle, however. Standing athwart the prospects for a second stimulus is the universal belief that the government has already enacted a massive stimulus program, to the tune of $787 billion, even as unemployment has risen to 10.2 percent. If that's what $787 billion produces, the thinking goes, why bother to try again?
In fact, that spending has saved or created more than 640,000 jobs, and possibly as many as 1.6 million, the Congressional Budget Office reported this week. More important, total government spending to combat the recession is far less than $787 billion.
For one thing, most of the funds appropriated for job-creating projects in 2009 and 2010 are to be spent in this quarter and next year. So we haven't seen the full effects yet. And $146 billion of the stimulus is targeted for the years 2011-19 -- bringing the short-term total of the package down to $641 billion.
Actual public spending to boost the economy is still a great deal smaller. For while the federal government has been pouring money into the economy to counter the collapse of private spending and investment, state and local governments have been taking money out of the economy in ways that deepen our decline.
A recent report from the Center on Budget and Policy Priorities assesses the 2009-10 budget shortfall for the 50 state governments at a stunning $350 billion -- a gap that the states (all but Vermont have to run balanced budgets) have addressed by slashing services, cutting jobs and raising taxes. "All these steps," the center concludes, "reduce the purchasing power of workers' families, which in turn affects local businesses."
In addition to state cutbacks and tax hikes, separate cutbacks and tax hikes among cities, counties and school districts come to a further $15 billion, estimates the Center for Economic Policy and Research. Now, not all of this $365 billion shortfall is addressed by cuts and higher taxes; state and local governments have also engaged in budget finagling. But assuming, conservatively, that states and localities are making cuts and raising taxes roughly at the level of $300 billion, net government spending to boost the economy this year and next is only $341 billion.
That means our federal stimulus package isn't the 2.6 percent of gross domestic product that was claimed but more like 1 percent. In the spring, you may recall, the administration chastised other nations for stimulus packages that it thought were too small -- by which it meant stimulus packages that came to around 1 percent of those nations' respective GDP.
Why is $341 billion a more accurate figure than $787 billion? Because the stimulus packages of virtually every other nation reflect or even understate the net total of government spending at the national and local levels. In most nations -- France and Britain, say -- government functions that are funded at the local level in the United States, such as schools and local infrastructure, are funded nationally. In other nations -- such as Japan and Switzerland -- local governments can and do run deficits in times of downturn. Only the U.S. version of federalism -- whose fiscal effects I describe in greater detail in the current issue of American Prospect, the magazine where I'm an editor -- requires state and local governments to abet a recession even as the national government tries to combat it.
Indeed, during a recession, the American system of government works like the bathtub in an old algebra problem ("old" means I had it in middle school). In it, water pours into the tub from the tap but exits the tub from a drain that isn't stopped. If you know the rates of filling and draining and the size of the tub, you can calculate the water level.
In an American recession, the federal government is the tap and the state and local governments are the drain. That's no way to fill a tub, and no way to fight a recession. Which is one more reason we need a big second stimulus, since our system doesn't let us plug the leaks.