Will Stimulus Become a $3 Trillion Nightmare?

A huge threat from the $800 billion stimulus plan in front of Congress this week is that much of the spending may morph into a permanent expansion of government. If the bill is signed into law, lobbyists will immediately start pressing for the long-term extension of all the new spending on health care, transportation, education and other items.

Let’s look at the Senate bill to illustrate the fiscal impact of such a nightmare scenario. The CBO finds that the Senate bill would increase outlays by $546 billion and cut taxes $292 billion over fiscal years 2009-2019.

Figure 1 shows CBO’s assumed pattern of spending under the bill. Since we are already part way through 2009, outlays peak in 2010 at $206 billion and taper off after that. Note that 41 percent of total spending occurs after 2010 because federal and state agencies have limits on how fast they can spend the huge pile of cash. (Thus 41 percent of spending in the bill is certainly not short-term “stimulus” even if you believe in Keynesian theory).

What if special interest groups successfully lobby to extend all the new benefits and subsidies? One possibility would be that the 2010 funding level of $206 billion is extended permanently, as shown in Figure 2. Rather than the stimulus bill costing $546 billion through 2019, it would trigger spending totaling $2.2 trillion over the period.

In sum, here are the budget effects through 2019 of the stimulus nightmare scenario:

- Temporary tax cuts in the Senate bill: $292 billion

- Spending continued permanently at the 2010 level: $2.2 trillion

- Rough guess at the additional federal interest costs: $500 billion

- Total increase in federal debt under nightmare scenario: $3 trillion

Extending the (mainly useless) tax cuts in the stimulus package would make deficits even larger. And, of course, all this increase in debt would come on top of the debt piling up from financial industry bailouts and regular budget spending. It’s madness.