Here are responses to three silly stimulus arguments I hear frequently.

Argument: This fiscal stimulus will increase economic growth and create jobs.

Response: As John Taylor points out, even if you believe this, you can’t forget the word temporarily.  The Administration refuses to produce their own estimates of the projected impact of the President’s new stimulus proposal, presumably because they burned themselves with their January 2009 estimate of the first stimulus.  They are instead leaning heavily on two private forecasts, by Macro Advisers and Democratic economist Mark Zandi.  (I frequently use MA’s forecasts in my work.)  The Administration forgets to mention that both these forecasts project only a temporary increase in GDP and employment growth from the President’s proposal.  Both predict that with the President’s new stimulus proposal, the economy would be stronger than it otherwise would be in 2012, but weaker than otherwise in 2013 and 2014 after the new policies have ended.

Both forecast a decline of at most 1 percentage point in the 2012 unemployment rate.  Many conservatives are skeptical the impact will be even that large.

Q:  Should Congress enact a proposal that includes deficit-increasing policies of $450 B that will, at best, temporarily reduce the unemployment rate by one percentage point for one year?  Whatever spending cuts and/or tax increases are enacted to offset this deficit increase could otherwise be used to reduce future budget deficits.

Argument: Temporary bonus expensing will help the economy grow.

Response: The same is true of temporary “bonus expensing,” in which Congress provides the ability for a firm to deduct from taxable income more business investment in the next year.  Like the President’s proposal, this is a timing shift.  As a temporary proposal, it would accelerate business investment into 2012 that would otherwise occur in 2013 and 2014.

If we were only looking at a projected one-year dip in GDP and job growth, then it might make sense to “borrow” growth from future years and bring it into 2012.  But when the projection is for slow growth over the next few years, these timing shifts don’t help unless you’re up for re-election in 2012.

I like the idea of permanent expensing of business investment.  Given current forecasts of slow economic growth over the next few years, I don’t see what is gained by this temporary timing shift.

Argument: Austerity measures will cause a fiscal contraction.

Response: Some on the Left argue that policies to address America’s expanding government and exploding budget deficits will cause a short-term fiscal contraction.  They make a traditional Keynesian argument: the economy needs more fiscal stimulus now, and if we cut spending too much we’ll hurt the recovery.  If you buy the traditional Keynesian fiscal stimulus argument, then this is indeed a theoretical concern.

This will never, ever happen, for both a policy and a political reason.  Deficit-reducing policy changes are always phased in over time, and the scored deficit reduction from both spending cuts and tax increases grows (linearly) with time.  The spending cuts and/or tax increases in the first couple years of a typical deficit reduction package are trivially small, a rounding error compared to a $15 trillion annual GDP.

And do you really think that politicians who are up for reelection next year (the President, 435 House Members and 33 Senators) will choose to concentrate policy and political pain in the next year by front-loading the spending cuts and/or tax increases?  Even if the natural timing of deficit reduction legislation did not delay the fiscal impact, the self-preservation instinct of politicians eliminates any practical risk of a large deficit-reduction package harming the economy in the short run.

(photo credit: D’Arcy Norman)