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CBO: Stimulus hurts economy in the long run

by Stephen Dinan The Washington Times Tuesday, November 22, 2011

The Congressional Budget Office on Tuesday downgraded its estimate of the benefits of President Obama’s 2009 stimulus package, saying it may have sustained as few as 700,000 jobs at its peak last year and that over the long run it will actually be a net drag on the economy.

CBO said that while the Recovery Act boosted the economy in the short run, the extra debt that the stimulus piled up “crowds out” private investment and “will reduce output slightly in the long run — by between 0 and 0.2 percent after 2016.”

The analysis confirms what CBO predicted before the stimulus passed in February 2009, though the top-end decline of two tenths of a percent is actually deeper than the agency predicted back then.

All told, the stimulus did boost jobs and the economy in the short run, according to CBO’s models. At the peak of spending from July through September 2010 it sustained anywhere from 700,000 to 3.6 million, which lowered the unemployment rate by between four-tenths of a percent to 2 percent.

The Obama administration had promised 3.5 million jobs would be produced at the peak of spending.

For this current quarter CBO said the stimulus is sustaining between 600,000 and 1.8 million jobs, which has improved the unemployment rate by as much as 1 percent versus what it otherwise would have been.

The White House did not return a message seeking comment Tuesday afternoon, but the president has defended the stimulus package as a bulwark against an even weaker economy.

Earlier this fall he proposed another round of spending, calling for $447 billion in expanded tax breaks, additional aid to states to hire teachers and emergency workers, and more infrastructure spending.

That broad effort has stalled, though on Monday Mr. Obama signed a slim portion of the package that offers tax breaks to businesses that hire veterans, and that repeals a 3 percent contract withholding requirement for government contractors.

CBO has re-evaluated the stimulus every three months, and its estimates for the total cost of varied. Initially the package was pegged at $787 billion, rose as high as $862 billion at one point, and it now projected to be $825 billion once all the money is paid out.

The non-partisan agency also has changed its model for the spending’s impact on the economy, and the new calculations show the Recovery Act did less than originally projected.

CBO said it has concluded there is less of an indirect multiplier effect of federal spending.

Those changes caused it to drop its estimates for total employment sustained by the spending in 2011 from between 1.2 million and 3.7 million down to between 600,000 and 3.6 million.

As for the long-term situation, CBO said its basic assumption is that each dollar of additional federal debt crowds out about a third of a dollar’s worth of private domestic capital.

CBO does not calculate crowding out in the short term, which is why the Recovery Act boosts the economy in the near term.

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