Even after being in Washington for nearly three decades, I still occasionally marvel at the stupidity and foolishness of the denizens of Capitol Hill. Like the recent “stimulus” bill. There’s no doubt that it is waste and abuse personified, much of it derived from the standard big‐spending liberal wish list. But we were told that wouldn’t matter, since spending, any spending, is what was necessary to get the economy moving.
But it turns out that even the Congressional Budget Office–the legislative branch’s own analytical agency–figures the legislation will make us worse in the long‐term. On Monday CBO reaffirmed its earlier conclusion:
In contrast to its positive near‐term macroeconomic effects, the legislation will reduce output slightly in the long run, CBO estimates. The principal channel for that effect, which would also arise from other proposals to provide short‐term economic stimulus by increasing government spending or reducing revenues, is that the law will result in an increase in government debt. To the extent that people hold their wealth as government bonds rather than in a form that can be used to finance private investment, the increased debt will tend to reduce the stock of productive private capital. In economic parlance, the debt will “crowd out” private investment. (Crowding out is unlikely to occur in the short run under current conditions, because most firms are lowering investment in response to reduced demand, which stimulus can offset in part.) CBO’s basic assumption is that, in the long run, each dollar of additional debt crowds out about a third of a dollar’s worth of private domestic capital (with the remainder of the rise in debt offset by increases in private saving and inflows of foreign capital). Because of uncertainty about the degree of crowding out, however, CBO has incorporated both more and less crowding out into its range of estimates of the long‐run effects of the stimulus legislation.
Since CBO expects the U.S. to return to full employment, the impact of the lower GDP will be lower wages:
The reduction in GDP is therefore estimated to be reflected in lower wages rather than lower employment, as workers will be slightly less productive because the capital stock is slightly smaller.
So, we are going massively into debt and mortgaging the future of the young for the purpose of … shrinking the economy! Workers will find themselves paying higher taxes to fund wasteful spending while … earning less! No wonder Washington is such an alien place to most Americans. Even after spending most of my adult life here, I still don’t get it.