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CBO on Senate Stimulus

February 5, 2009 - by Donny Shaw

At the request of Commerce Secretary-designate Judd Gregg, the Congressional Budget Office has run a macroeconomic analysis to the Senate’s version of the stimulus. The analysis is chock full of caveats – “the macroeconomic impacts of any economic stimulus program are very
uncertain,” “economic theories differ,” etc. – but since the CBO is the official, non-partisan agency for scoring legislation, any report they issue is worth a gander.

One of the key findings is that the short-term stimulative effects of the Senate version are greater than those in the House version. Here are the three reasons they provide for that:

>First, the Senate legislation’s provisions regarding the alternative minimum tax (AMT), which do not appear in the House bill, would add stimulus to the economy, especially in 2010. Second, the Senate legislation would allow faster spending from the State Fiscal Stabilization Fund, increasing such spending by about $20 billion over the 2009-2010 period compared with that under the House bill (and decreasing spending correspondingly in the following years). And last, the estimated decrease in withholding (and thus the reduction in revenues) associated with the Making Work Pay Credit would be greater in 2009 under the Senate legislation than under H.R. 1. [emphasis mine]

I emphasize that sentence because the State Fiscal Stabilization money is the largest item – totaling $24.8 billion – that the Nelson/Collins gang is trying to cut from the bill. The coalition’s stated goal is to remove “non-stimulative” items from the bill, yet the CBO report seems to indicate that the state stabilization fund passes the timely-temporary-and-targeted test with flying colors.

The other key finding is that in the long run, the stimulus could reduce GDP. From the CBO Director’s Blog:

>In contrast to its positive near-term macroeconomic effects, the Senate legislation would reduce output slightly in the long run, CBO estimates, as would other similar proposals. The principal channel for this effect is that the legislation would result in an increase in government debt. To the extent that people hold their wealth in the form of government bonds rather than in a form that can be used to finance private investment, the increased government debt would tend to “crowd out” private investment—thus reducing the stock of private capital and the long-term potential output of the economy.
>The negative effect of crowding out could be offset somewhat by a positive long-term effect on the economy of some provsions—such as funding for infrastructure spending, education programs, and investment incentives, which might increase economic output in the long run. CBO estimated that such provisions account for roughly one-quarter of the legislation’s budgetary cost. Including the effects of both crowding out of private investment (which would reduce output in the long run) and possibly productive government investment (which could increase output), CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net.

In the actual report (which is actually a letter), CBO notes that effects on the GDP do not necessarily correlate with people’s well-being. “Healthier children or shorter commute times can improve people’s welfare without necessarily increasing the nation’s measured output in the long run (though spending in those areas would still provide short-run stimulus).”

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