We Need Big Government Today, Smaller Government Tomorrow

It turns out that when it comes to the stimulus debate, both the Democrats and the GOP are right, but for the wrong reasons.

The Congressional Budget Office released its full economic analysis of the American Recovery and Reinvestment Act late on Monday. It used “a range of estimates … that encompass a majority of economists’ views” to produce multipliers, estimating the effect that a single dollar spent by government (or foregone through tax cuts) has on the broader economy.

And making government bigger works best! In fact, economically, it can’t go wrong—purchases of goods and services by the federal government, and transfers to state and local governments for infrastructure, each generate one to 2.5 times the value spent in terms of return to GDP.

Meanwhile, those tax cuts that were the centerpiece of President Obama’s middle-class appeal, including the “Making Work Pay” credit? Less valuable—from a net loss (0.5 multiplier as a low-end estimate) to a modest benefit (1.7 multiplier on the high end). Meanwhile, the CBO seems to confirm that an increase in the alternative minimum tax exemption is pure political sop that causes economic harm (a multiplier ranging from 0.1 to 0.5).

But the CBO also says that the anti-stimulus zealots have a point. In 2016, the package could reduce GDP by as much as 0.2 percent, compared to having no stimulus. Why? It’s not because of those upper-class tax increases, at least not directly. Rather:

[T]he legislation will reduce output slightly in the long run, CBO estimates. The principal channel for that effect … 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.

Long-term projections are a mug’s game. But we’ll be looking to the nonpartisan CBO (whose former director, granted, is Peter Orszag, now President Obama’s budget director), a wonderful resource for all kinds of handy numbers and projections, to cut through the windy claims made on the congressional floor.