Tag: american recovery and reinvestment act

Obama’s Stimulus: A Bit of Pork, a Lot of Opportunism

A study [$] published in the winter edition of Political Science Quarterly considers two possible reasons for why the 2009 American Recovery and Reinvestment Act (ARRA) failed to sprinkle Uncle Sam’s magic dust onto those areas of the country that were being hardest hit by the recession. 

Was it because well-positioned politicians were successful in delivering the pork? 

Or was it because the recession created a “window of opportunity” for politicians to quickly spend a bunch of additional money on pet causes, which had the effect of benefitting certain areas of the country? 

I’m going to skip right to the answer: the uneven geographic distribution of stimulus funds had only a little to do with traditional pork barreling and much to do with Obama’s then chief of staff Rahm Emmanuel’s famous quip that “You never want a serious crisis to go to waste.” 

On the possibility of traditional pork-barreling, the authors found no statistically significant relationship between the distribution of funds and whether a county was represented by a politician serving on a congressional committee relevant to stimulus funding. Nor was a relationship found between funding and counties that were represented by a Democrat in the House or Senate. However, a relationship was found between funding and those counties that overwhelmingly voted for the president: 

There does, however, appear to be a distinct tilt toward counties that were stronger for the Democratic Party in 2008. All else equal, counties at the 90th percentile of Democratic share presidential vote ’08 received between $35 and $36 more per capita in both total funding and infrastructure projects than did counties at the 10th percentile (p ≤ .001)…The effect of presidential politics may be especially relevant for the distribution of ARRA funds because most of the grants, loans, and contracts funded by the stimulus were in discretionary programs overseen by administrative agencies, over which presidents and their political appointees exercise influence. 

On the other hand, the authors found that a county possessing attributes that synched with the policies funded in ARRA were more likely to receive money. For example, a county with a lot of interstate highway mileage made out better than a county that did not. Another example is counties that had a larger share of state and local government workers received a larger share of funds. 

While it’s not surprising that legislation that funds highway infrastructure projects would benefit areas with more highway mileage, let’s remember that the stimulus was sold by many politicians as being necessary to help those with the greatest need. Indeed, as the authors point out, the text of the legislation stated that a main goal was “to assist those most impacted by the recession.” 

The bottom line is that the Obama administration used the economic downturn to spend a bunch of money it otherwise would not have been able to on a stack of its pet policies. In the process, the counties that did the most to put Obama in the White House received a taxpayer-funded thank you in return.  

Happy National Entrepreneurs’ Day?

President Obama has proclaimed today to be National Entrepreneurs’ Day. The president who has brought us regime uncertainty, more regulations, more government intrusion into the economy, more debt, and is proposing to raise taxes on productive businesses and individuals wants to celebrate entrepreneurship?

I was alerted to National Entrepreneurs’ Day via an email (not online) from the Department of Commerce’s Economic Development Administration. The EDA email makes it clear that the administration wishes to celebrate political entrepreneurship, not market entrepreneurship.

In his book, The Myth of the Robber Barons, historian Burton Folsom explains the difference:

A key point about the steamship industry is that the government played an active role right from the start in both America and England. Right away this separates two groups of entrepreneurs — those who sought subsidies and those who didn’t. Those who tried to succeed in steamboating primarily through federal aid, pools, vote buying, or stock speculation we will classify as political entrepreneurs. Those who tried to succeed in steamboating primarily by creating and marketing a superior product at a low cost we will classify as market entrepreneurs. No entrepreneur fits perfectly into one category or the other, but most fall generally into one category or the other. The political entrepreneur often fits the classic Robber Baron mold; they stifled productivity (through monopolies and pools), corrupted business and politics, and dulled America’s competitive edge. Market entrepreneurs, by contrast, often made decisive and unpredictable contributions to American economic development.

As Obama administration achievements, the EDA touts increased Small Business Administration subsidies and a smorgasbord of industrial planning contained in last year’s stimulus package:

The American Recovery and Reinvestment Act served as the cornerstone for this new foundation by pumping $100 billion into the economy to help us tackle some of the grand challenges of the 21st century in diverse fields from healthcare IT and health research, to clean energy, to smart grids, and high speed trains. Recovery Act investments are creating a virtuous cycle of investment, innovation, and job creation that have so far led to the creation of 3 million new jobs.

Wrong. The stimulus has fueled an unvirtuous cycle of political entrepreneurship in which business interests chase federal hand-outs for endeavors sanctioned by inside-the-Beltway planners. Political entrepreneurs have less incentive to innovate and are naturally reluctant to criticize the government because they don’t want to bite the hand that’s feeding them. As Chris Edwards puts it, they become “tools of the state.”

If the administration were really interested in promoting entrepreneurship, it would repudiate the anti-market policies it has pursued thus far. That’s obviously not going to happen, so it’s going to be up to congressional Republicans to repudiate their own history of supporting federal subsidies. In other words, the GOP’s re-found fondness for limited government rhetoric is going to have to actually be matched by action.

Merry Christmas, Ivory Tower!

If you ever want to see how federal student aid is used for political gain, look no further than the report on the American Opportunity Tax Credit released today by the U.S. Treasury Department.  The accolade-begging for the President begins right on the cover page:

The President created the American Opportunity Tax Credit (AOTC) as part of the American Recovery and Reinvestment Act, which he signed into law in February 2009. For tax years 2009 and 2010, the new law allows families with tuition expenses to receive a tax credit of up to $2,500 per student, and up to $1,000 per year of this amount is refundable. If the AOTC is made permanent, as proposed in the President’s FY 2011 Budget, a student could receive a credit up to $10,000 over four years. 

The President, of course, doesn’t create these things, the legislative branch does. But the Prez, apparently, wants the credit for the credits. A White House event  scheduled for today suggests why: It appears that the President will be using the report, as well as his proposal to extend the AOTC, to curry favor with college students, a potentially large voting bloc. 

The content of the report, unfortunately, is just as bad as its PR use, going on and on about how much free money the credit offers for college, and breaking down the benefits so every type of filer can see how he or she might benefit. Meanwhile, there’s hardly amention of the AOTC’s cost – something in which you’d think the Treasury Department would be at least a little interested.  But, to be fair, I’m not just talking about the obvious cost to taxpayers who will sooner or later have to foot the bill for this Santa Claus program. Arguably the even bigger cost is that expanding federal aid like this ultimately just enables colleges to raise their prices and capture the money, making it a major, self-defeating source of fuel for rampant tuition inflation.

So the AOTC will do little or nothing to make college more affordable in the long-run. It will, though, make colleges and their employeesbetter off, and create the powerful illusion that Washington politicians – especially, in this case, the President – are doing their best to make college affordable for all.  And that, as pure-PR reports like this one strongly suggest, is likely the primary goal.

High-Speed Rail Battle

Wisconsin has become a battleground over the Obama administration’s plan to create a national system of high-speed rail. Of the $8 billion in HSR grants awarded to the states in the stimulus bill, $810 million of it went toward a high-speed route between Milwaukee and Madison.

Ironically, this Wisconsin “high-speed” route would only achieve speeds of 79 mph initially and 110 mph by 2016. As a Cato essay on high-speed rail points out, HSR aficionados don’t even consider 110 mph to be true high-speed. In fact, passenger trains were being run at speeds of 110 mph or more back in the 1930s. And those “high-speed” trains didn’t prevent the decline of passenger trains after World War II.

The Cato essay also notes that the 85-mile line between Milwaukee and Madison “is only a tiny portion of the eventual planned route from Chicago to Minneapolis, and no one knows who will pay the billions necessary to complete that route.” In fact, to build a national system of true high-speed rail on the 12,800 mile network envisioned by the administration, the cost could be close to $1 trillion.

Where would the money come from? State governments are hoping that it would be all from federal taxpayers. As I recently discussed, the states’ interest in grabbing new federal HSR money has dropped now that Congress is requiring a 20 percent state match:

The states already have dedicated revenue sources for federal highway aid matching requirements (also 20 percent). With state tax revenues flat due to the recession, where would the money come from to pay for high-speed rail projects? Proposing new taxes to fund high-speed rail would probably be political suicide. And most state policymakers recognize that shifting money away from more popular programs to pay for high-speed rail won’t be any more politically rewarding.

The issue is even affecting elections in states that are in line to receive federal funding for high-speed rail. Scott Walker, a Republican candidate for governor in Wisconsin, recently said he’d send back the $810 million in stimulus funds the state has received for a rail line between Madison and Milwaukee. Walker appears to understand that his state has more pressing infrastructure needs and that high-speed rail could become a fiscal black hole.

On Tuesday, Walker won the GOP primary to replace outgoing Democratic Governor Jim Doyle, who is an ardent supporter of the Milwaukee-Madison route. Walker’s Democratic opponent, Milwaukee mayor Tom Barrett, supports the route’s construction. According to Stateline.org, the outgoing Doyle administration plans to have $300 million of the money under contract by January, which Walker says he would cancel if elected.

Wisconsin Democrats have made hay out of the fact that former Republican Governor Tommy Thompson first championed the idea of a regional network of high-speed rail. Unfortunately for HSR proponents, Thompson’s past involvement with federally-subsidized rail is a reason not to build the route.

From a Cato essay on Amtrak subsidies:

Amtrak reform legislation in 1997 stipulated that its board be replaced with a “reform board” of directors. The Clinton administration nominated, and the Senate confirmed, politicians that included the then-governor of Wisconsin, Tommy Thompson, and the mayor of Meridian, Mississippi, John Robert Smith. Mayor Smith tried to create a route that would have lost millions linking Atlanta and Dallas via Meridian. Governor Thompson succeeded in creating a route from Chicago to Janesville, Wisconsin. It was eventually discontinued after Thompson’s departure from the board due to low ridership and financial losses.

As is the case with Amtrak, HSR can’t compete with more efficient modes of transportation like automobiles and airplanes without massive subsidies. At a time when the federal debt is heading toward the moon, policymakers should be looking to the private sector to take care of our transportation needs. The country simply can’t afford to sink taxpayer money into high-speed rail when it makes so little economic sense.

Can Unemployment Benefits Create Jobs?

At the Center on Budget and Policy Priorities, sociologist Michael Leachman claims “some of the most effective job-creation and job protection measures” in last year’s American Recovery and Reinvestment Act are excluded from the job figures to be released on recovery.gov on January 30.   He explains that, “Most of ARRA’s distributed dollars to date have gone directly to individuals (including greater jobless benefits and food stamps) and states (including greater federal support for Medicaid).  Although these dollars are likely protecting or creating hundreds of thousands of jobs, none of the aid for individuals or the Medicaid support are [sic] reflected in the January 30 jobs data release.”

In particular, Leachman claims Recovery Act funds to extend unemployment benefits from 26 to 79 weeks (and to 99 weeks since November) “produces and sustains jobs.”  For proof, he cites estimates from Mark Zandi of Economy.com “that every dollar spent on extending unemployment insurance benefits produces $1.61 in economic activity.”

This analysis runs into two big problems.  The first is that it assumes that the amount of time people spend on unemployment insurance is unrelated to how long the government offers to keep paying benefits.  The second is that it assumes that the assumptions about “fiscal multipliers” built into Economy.com econometric model are actually evidence rather than just assumptions.

On the first point, page 75 of the 2007 OECD Employment Outlook explains: “It is well established that generous unemployment benefits can increase the duration of unemployment spells and the overall level of unemployment… This could have a negative impact on productivity through inefficient use of resources and depreciation of human capital during long spells of unemployment. In addition, by reducing the opportunity cost of unemployment, generous unemployment benefits may lead existing employees to reduce their work effort, thereby lowering productivity (see e.g. Shapiro and Stiglitz, 1984; Albrecht and Vroman, 1996).”

As I recently noted, the overwhelming evidence that extended unemployment benefits raise the duration and rate of unemployment comes from economists in the Obama administration, Larry Summers and Treasury economist Alan Krueger, as well as many others such as Lawrence Katz of Harvard and Bruce Meyer of the University of Chicago.

Contrary to Leachman, bribing people to stay on the dole for an extra 53-73 weeks leaves them with less money to spend, not more.   It also looks bad on resumes, and may cause lasting damage to future job prospects.

Leachman’s second problem concerns fiscal multipliers, such as Zandi’s astonishing 1.6 multiplier for unemployment benefits.

In a similar effort to pretend that borrowed money is free, and therefore “creates jobs,” the Council of Economic Advisers claims to use “mainstream estimates of economic multipliers for the effects of fiscal stimulus.” Yet the cited sources are not from academic research at all, but from the mysterious innards of notoriously unreliable econometric forecasting models from Economy.com, Global Insight, J.P. Morgan Chase and Goldman Sachs.

At the Federal Reserve Bank of San Francisco, by contrast, economist Sylvain Leduc surveyed contemporary research by ten distinguished scholars, including current CEA chair Christina Romer and IMF chief economist Olivier Blanchard.

“An interesting aspect of this new literature,” wrote Leduc, is that, notwithstanding their vastly different methodologies, they reach surprisingly similar conclusions. Regarding the impact of tax cuts on the level of real GDP one year after the change in taxes, the three studies predict a multiplier of roughly 1.2…  Moreover …  in contrast to theoretical predictions from the simple Keynesian framework, the analyses found that government spending had less bang for the buck than tax cuts. For instance, one year after the increase in spending, the impact on the level of real GDP is less than one-for-one, partly reflecting a decline in investment.”

In this new academic research, the estimated multiplier for deficit spending ranged from 0.4 to 0.6 — meaning a dollar of added federal debt added far less than a dollar to GDP.   Moreover, an IMF paper on “Fiscal Multipliers” adds that negative multipliers are quite possible: “fiscal expansions can be contractionary if they decrease consumers’ and investors’ confidence, especially if the fiscal expansion raises, or reinforces, fiscal sustainability concerns.”

Whether the government pays people to work or to stay on the dole, it has to get the money by taxing, borrowing or printing money — all of which reduce real income and employment opportunities in the private sector.  To imagine that borrowing from Peter to pay Paul is a way to create or save Paul’s job is to forget that Peter expects his money back with interest.

If every dollar of unemployment benefits really added $1.61 to real GDP, then putting everyone on the dole would make us all much richer