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The CBO Spills the Beans By: Marion Edwyn Harrison, Esq.
FrontPageMagazine.com | Thursday, February 26, 2009

In move hailed in so much of the media as a victory which will re-ignite the American economy and create millions of jobs, President Barack H. Obama recently signed H.R. 1, the American Recovery and Reinvestment Act of 2009, or, as it is more commonly known, the “Stimulus Bill.”  Lobbyists, states and various groups now are lining up to claim their piece of the pie, while the Obama administration has modified its rhetoric about the impact the bill will have upon the economy.   White House spokesman Robert Gibbs stated, “[The economy] has not yet bottomed out.  [It is] probably going to get worse before [it] improves.  But this is a big step toward making that improvement and putting people back to work.”  Gibbs also hinted at the prospect of another, similar bill should the economy not recover in the near future.

What remains to be seen are the consequences of the Stimulus Bill.  Prior to its enactment, the Congressional Budget Office (CBO), the Congressional non-partisan research branch, prepared two separate analyses of the legislation.  In its initial report, issued February 11, it noted that “the macroeconomic impacts of any economic stimulus program are very uncertain,” particularly for a large fiscal stimulus, which rarely is attempted.  Despite the uncertainty of a precise outcome, CBO noted that in the short run the stimulus legislation probably would raise Gross Domestic Product (GDP) and increase employment.  Over the coming years, however, the legislation likely will reduce output, primarily because it will result in a dramatic increase in Federal Government debt.  Notes the report, “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 would tend to reduce the stock of productive private capital.”  In other words, this legislation will vastly increase the size of government while reducing the private sector, the fundamental source of any economic recovery (and a healthy economy, for that matter).

The report further states, “In principle, the legislation’s long-run impact on output also would depend on whether it permanently changed incentives to work or save. However, according to CBO estimates, the legislation would not have any significant permanent effects on those incentives.” The problem is that the Stimulus Bill as signed into law contains vastly excessive government deficit-spending and too few tax cuts for businesses and individuals, which cuts would encourage both to invest in the economy.

Two days after the initial report, CBO issued another statement on the Stimulus Bill.  In this second report it estimated that between 2009 and 2019 H.R. 1 would cost American taxpayers $787.2 billion, more than any other single piece of legislation in history.  Such debt ultimately will reduce GDP, leading to lower wages for American workers because “…each dollar of additional [government] debt crowds out [from the market] about a third of a dollar’s worth of private domestic capital.”

Nor is the Stimulus Bill the only spending bill Congress will pass this year, as various appropriations must be enacted into law to keep various government programs and departments functioning. Early estimates suggest that these appropriations may reach $410 billion.  In addition, President Obama has proposed $75 billion for homeowners who cannot pay their mortgages.  Many economists are predicting that the budget deficit for Fiscal Year 2009 (October 1, 2008-September 30, 2009) alone will reach $1.6 trillion, about three times the size of last year’s Federal deficit.  Such unprecedented deficits undoubtedly will create myriad and major problems for the economy.

We must return to a policy of fiscal restraint and balanced budgets.  Otherwise, our economic recovery could be much smaller and come to fruition in a far distant future.

Marion Edwyn Harrison is President of, and Counsel to, the Free Congress Foundation.

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