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A better way than government spending

January 27, 2009 | By Nathaniel Ward

"We are spending more than we have ever spent before, and it does not work," said Henry Morgenthau, FDR's Treasury Secretary and architect of the New Deal. The reason spending didn't work then – and won't now – is because government spending does not help the economy out of a recession. To insist that it will, like so many liberals in Washington do, is to be oblivious to commonsense economic principles.

The gargantuan economic stimulus bill proffered by President Barack Obama, Speaker Nancy Pelosi, and Senate Majority Leader Harry Reid is expected to go to the floor of the House tomorrow.

The Heritage Foundation is in the thick of this debate promoting the best ways to help our economy out of recession. A Senate staff member recently told our policy experts that "Heritage stuff has been rapid fire, ahead of the curve, and a great resource for staffers on the stimulus!"

On Townhall.com, Heritage President Ed Feulner cites the parallels between when President Reagan took office and the position that President Obama is in today. "Our leaders are pouring on the spending," writes Feulner, "but the economy refuses to be stimulated."

Reagan understood that, in the United States, the people rule. And that means we need to recognize that economic growth isn't generated by government giving us things. The government's job is to create a climate that makes the good things we work for possible.

The financial crises across the globe hinge on the success or failure of our actions, says Feulner, and the only quick and effective remedy is to cut tax rates.

He points to a plan laid out by Heritage experts Bill Beach and J.D. Foster.

The centerpiece of an effective stimulus policy should involve two elements:

1. Extend the 2001 and 2003 tax reductions for as long as possible--certainly through at least 2013 to prevent a tax increase. Better yet, make the tax reductions permanent; and

2. Reduce tax rates on individuals, small businesses, and corporations through 2013 by lowering the top rate by 10 percentage points and reducing rates by similar amounts for lower income level taxpayers.

These policies would:

1. Soften the recession in 2009 and speed the economic recovery through  2010 and beyond;

2. Increase employment by a half million jobs in 2009 and by 1.3 million jobs in 2010 and create 4.8 million jobs from 2009 through 2012; and

3. Reduce federal tax receipts during the critical fiscal years of 2009 and 2011 by $636 billion.

Heritage experts Rea Hederman and Ryan Tang explain how Congress can drastically improve the bill. They write that the tax rebates in the spring of 2008 did not stem the recession because they "did not increase the marginal incentive to work and because they did not create any permanent change to the individuals' real wealth." These two flaws remain in the $275 billion that President Obama has allocated for tax relief in the stimulus package, and there is no reason for us to expect they will help Americans fare better then the last round of rebate checks.

A 10 percent reduction in corporate taxes would be a better way to boost the economy, Heritage experts argue.

A reduction of 10 percent in the statutory corporate tax rate for income and capital gains would achieve superior economic growth. The Joint Tax Committee (JTC) reports that this type of tax cut would increase investment, which "results in more goods and services and higher total output. It also results in higher labor productivity, leading to increased wages and employment." A more aggressive stimulus bill would be a 20 percent reduction in corporate rates, which would amount to almost $275 billion in tax cuts in the first five years.

Heritage's blog, The Foundry, suggests a new name for the stimulus package: "The Pelosi-Reid-Obama Debt Plan." They offer a short index of why spending does not equal stimulus, plus some other helpful nuggets worth mentioning in conversations and letters to the editor:

High cost to American taxpayers:

  • After Congress appropriates the FY'09 omnibus bill, they may have spent over $1.4 Trillion in less than one month.
  • The current "stimulus bill" will be the largest spending bill ever enacted by Congress, making the New Deal look small, accounting for inflation.
  • The $825 billion "stimulus" bill is equivalent to borrowing $10,520 from every family in America. This money has to be paid back.
  • If government spending solved recessions, we would never have recessions.

The hidden liberal policy agenda inside the 'stimulus' bill:

  • Over $142 Billion in Federal education funds to appease the teacher's union.
  • $87 Billion Medicaid bailout: Medicaid is funded in part by states. If we keep bailing states out, they will have every incentive to continue irresponsible spending. Fiscally responsible taxpayers in Indiana are now paying for fiscally irresponsible bureaucrats in Illinois.
  • Expanded Medicaid coverage and SCHIP: Reid-Pelosi-Obama are enacting a nationalized health care policy with no debate. The government will soon be responsible for more health care spending than the private sector.
  • Green Jobs: The myth of 'green jobs' merely means replacing one job lost, with a new job that fits the left's agenda.
  • Redistribution: Refundable Tax Credits for people who don't pay taxes.
  • Pork Spending: Digital TV Coupons ($650 Million), Gov't Cars ($600 Million), Nat'l Endowment for the Arts ($50 Million), Repairs to National Mall ($200 Million, including $21m for sod).

Writing on OneNewsNow.com, Heritage expert Brian Riedl explains the liberal thinking on the stimulus:

People believe that the government has some magic wand to magically pass a stimulus bill and make the economy grow. All this is really the Obama debt plan. All Congress is going to do is add $800 billion to the national debt. They're going to borrow $800 billion from one part of the economy, give $800 billion to people in another part of the economy, and then somehow tell us we're richer.

Heritage is partnering with other conservative groups to sponsor a critical tool to help Americans get the facts on the legislation: www.ReadTheStimulus.org. You can read the bill yourself and leave a comment.

— David Talbot

Other Heritage work of note

  • Former Labor Secretary Elaine Chao will return to The Heritage Foundation next month as a Distinguished Fellow.  In 2001, Chao was serving as a Heritage expert when George W. Bush appointed her secretary of labor. Chao will give public lectures and concentrate on international policy issues—especially U.S.-Asia relations—as well as labor policy.
  • Senator Jim DeMint (R-SC) spoke today at Heritage's Conservative Blogger Briefing today. He told the assembled bloggers about his alternative proposal to get the economy back on track, which he called "the Heritage Plan" because it is modeled after Heritage Foundation recommendations.

    Senator Jim Demint (R-SC) addresses Heritage's Conservative Bloggers Briefing on January 27, 2009.

In other news

Upcoming webcasts

The Heritage Foundation is pleased to present the following webcasts for our members and supporters. You can watch the webcasts live on MyHeritage.org. All times are Eastern.

  • On Thursday, January 29 at 9:45 p.m., conservative pundit Michael Barone will speak about the current political situation at a meeting in Denver sponsored by the Colorado Committee for Heritage.

Coming up at Heritage

To attend these or any other events at Heritage please RSVP at Heritage's website. Or you can view these events live online. All times are Eastern.

Nathaniel Ward is the Editor of MyHeritage.org—a website for members and supporters of The Heritage Foundation. David Talbot contributed to this report.