In the debate on Capitol Hill over how much more taxes should be cut to stimulate the lagging U.S. economy, little attention has been paid to the stimulus already flowing from large spending increases, mostly for defense and homeland security, enacted over the past two years. One analysis released last week estimated that increased spending is providing nearly as much boost to the economy this year as did the tax cuts passed in 2001 and last year.
"Fiscal policy has turned sharply stimulative, and in combination with easier monetary policy is providing the most potent policy support the economy has ever received," said the analysis by economist James E. Glassman of J.P. Morgan Chase Securities Inc. "The public -- and the politicians -- give the 2001 tax law much of the credit for this timely fiscal punch," Glassman said. "The truth, however, is a bit different. Federal spending has expanded over the past year and a half by an amount that rivals tax relief. Half of this year's fiscal boost comes from new federal outlays, not from tax cuts."
A recent Commerce Department report said that half the gain in the weak 1.4 percent annual rate the gross domestic product grew in the fourth quarter was due to federal spending, two-thirds of which was for defense.
And the Congressional Budget Office estimated Tuesday that President Bush's fiscal 2004 budget proposals would raise spending over the next five years by $348 billion -- not counting the $75 billion supplemental request to fund the war in Iraq -- nearly as much as the $454 billion the plan would reduce revenue by cutting taxes.
With the federal budget deficit soaring, many members of Congress have shied away from touting any stimulative effect from added spending, according to staffers on the House and Senate Budget committees.
Some of the biggest supporters of the Bush administration's budget, including its proposed tax cuts, "have been saying over the past few months that deficits caused by spending increases are the only ones that matter," Stanley E. Collender, managing director of federal budget consulting at Fleishman-Hillard Inc., noted this week.
The added spending has not been as noticeable as the large tax cuts Congress has enacted.
"Congress has approved at least 10 spending initiatives since the summer of 2001," Glassman said. "First, the tax-cut agreement of 2001 also boosted spending by increasing the earned income tax credit and the child tax credit. A couple of weeks later, before the September 11 terrorist attacks, the 2001 Supplemental Appropriations Act boosted discretionary spending, principally for defense. After the terrorist attacks, Congress passed an emergency spending measure and boosted discretionary spending for both defense and nondefense programs."
Last spring, an economic stimulus plan "raised spending by about $50 billion annually for three years," he continued. "Other measures approved last year, related to trade, farm aid, terrorism risk insurance, unemployment insurance and defense, also . . . resulting in higher spending this year." And the final fiscal 2003 appropriations bill passed last month added about $5 billion more, he noted.
Glassman's analysis was based on an approach that eliminates the impact of economic fluctuations on the budget, such as changes in unemployment. It concluded that fiscal policy has swung in the direction of stimulus over the past two years by an amount equal to roughly 4 percent of the gross domestic product. Economists generally regard a change equal to about 1 percent of GDP as likely to have a measurable impact on economic activity.
Some other economists, such as Charles L. Schultze of the Brookings Institution, who estimate the amount of stimulus from discretionary spending somewhat differently, think it will be under 1 percent of GDP in the current fiscal year.
"That's not huge, but it is not to be dismissed either," Schultze said.