It is becoming increasingly clear the massive “stimulus” bill rushed through Congress and signed by the president was neither intended nor designed to be an economic stimulus bill in the classic Keynesian sense.
Under Keynesian theory (which is shaky, but leave that aside for the moment), the important thing for the government to do in a downturn is to inject as much money into as many parts of the economy as possible, as quickly as possible.
The quickest way is through tax cuts or suspending the Social Security and Medicare taxes for at least a year, giving people more money in their pockets right away.
Another way to do stimulus, as analyst Robert Rector reminded, would have been to give everybody who received an Earned Income Tax Credit payment last year another payment of similar size immediately.
“You could have injected $50 billion into the economy in 14 days, and done it through putting money into the hands of low-income people,” Rector said.
The bill did expand the EITC and create several other “tax credits” for people who didn’t have enough income to pay taxes. But it won’t put that money into the economy until April 2010. Some quick stimulus!
One particularly egregious aspect of the bill is it essentially overturned one of the signal policy achievements of the 1990s, the welfare reform bill signed by former President Clinton in 1996. That reform not only reduced the Aid to Families with Dependent Children caseload by two-thirds, it reduced the poverty rate, especially for minority children, and put millions of formerly dependent people to work and on the road to independence.
The 1996 reform gave each state a block grant, calculated on the basis of population and other factors, giving states an incentive to target money at those who truly needed it and the flexibility to spend the money effectively. It worked.
The new “stimulus” bill, however, provides $4 billion to be spent by paying 80 percent of the cost of each new recipient. So for every $1 a state spends on a new welfare “client,” a state gets $4 in “free” money from the feds. The incentive, then, is to add as many people as possible to the welfare rolls.
It is difficult to interpret the decision to change the funding formula and eliminate the Clinton-era welfare reform measure as anything other than a deliberate attempt to increase the number of people dependent on government welfare payments.
The bill also contains a half dozen new entitlements or expansions of existing programs. The cost is variously estimated (people are still scanning the 1,400-page bill that no member of Congress could possibly have read for more surprises) at between $220 billion and $250 billion a year in ongoing additional welfare spending.
If these radical increases in the welfare state had been proposed through ordinary congressional procedures — subcommittee hearings, witnesses from all sides, committee hearings, proposed amendments, a modicum of publicity — it is unlikely they would have stood a chance of passing. But the bill was assembled in secret and passed in haste encouraged by presidential inducement of panic, without even a pretense of due deliberation. So much for transparency.