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Seven Skepticisms About Stimulus Spending

by Fergus Cullen

This article originally ran in the Waterbury Republican-American on Sunday, July 5, 2009.

Will Rogers might have said, “Half of all money spent by government is wasted. The government just needs to hire a few more bureaucrats to figure out which half.” Unfortunately, less than half of the so-called stimulus money allocated to Connecticut will be spent on things that actually stimulate the economy, according to a new analysis by the Yankee Institute.

It’s been three months since the $787 billion American Recovery and Reinvestment Act (ARRA) – the “Stimulus Bill” – zipped through Congress. The theory behind the stimulus is that a surge in government spending, funded by borrowing money and increasing the deficit, will lead to economic recovery and higher employment. Here are seven reasons to be skeptical about how stimulus money is being spent in Connecticut:

Most federal stimulus money replaces existing state money: Of the $3.5 billion in government stimulus spending allocated to Connecticut over the next three years, nearly two-thirds of it replaces existing state funds. The bulk of this money is comprised of $1.3 billion in extra federal funding for Medicaid services for the poor and $745 million for local education. Moving this burden from state taxpayers to federal taxpayers (and let’s not forget, these groups represent different pockets in the same pair of pants – your pants) may help the state avoid cuts, lessen the urge to raise taxes, and protect existing government jobs, but it doesn’t add new money to the picture, so it’s not stimulative.

The majority of that money goes to relatively strong industries: The two industries that get the most stimulus funding – health care and public education – are also the two industries least affected by the current recession. These sectors, along with government employment, have actually added jobs during the current recession.

Tax cuts aren’t always stimulative. We at the Yankee Institute are all for tax cuts, and about 30 percent of Connecticut stimulus money – $1.6 billion over three years, which is on top of the $3.5 billion in direct spending – is in the form of tax cuts. (For comparison, the Bush administration’s 2008 tax rebates totaled $1.1 billion in Connecticut, and that was compressed into one year, not three.) The theory that tax cuts stimulate the economy hinges on the assumption that the money gets spent by consumers and businesses, but they could save the extra money or use it to pay credit card debt instead. Tax cuts in the form of reduced withholding are spread out little by little over the year, so consumers might not even feel it.

Spending in the future isn’t stimulative today: Despite all the talk of “shovel-ready” projects, the Congressional Budget Office analysis of ARRA estimates that only 21 percent of spending will take place this fiscal year. Talk of rising employment in 2010 or 2011 doesn’t do much for former manufacturing or housing sector workers who need a job today.

Connecticut gets less than others: Federal tax policy is fundamentally redistributive, transferring money from wealthier states and individuals to poorer ones. This is true of stimulus spending as well. At $769 per capita, Connecticut receives less than its neighboring states and has the second lowest rate in New England.

Spending postpones the day of reckoning: State government officials have struggled mightily to deal with the existing budget deficit while balancing the next one. Now imagine how difficult it will be to balance future budgets when the stimulus windfall is gone.

Free money warps priorities: If you think government is expensive now, wait until it’s free. The state is buying 106 new hybrid buses for $71 million and funding 4,500 summer jobs for young people for $11 million more. There’s $3 million for lead abatement in Waterbury, $800,000 for a new roof on a building at Camp Rell in Niantic, and $585,000 to fight internet crime. It is doubtful whether a majority of stimulus-funded projects would earn funding if they had to compete for existing scarce resources.

The Yankee Institute study does identify some expected Connecticut job creation as a result of $3.5 billion in spending. We estimate that about 700 construction jobs per year will be supported by ARRA’s increased highway funds. Water and sewer infrastructure projects will support about 145 jobs per year. The individual tax breaks, depending upon the percentage of tax cuts that get spent versus saved, could have the largest impact, supporting another 7,310 jobs in Connecticut.

Nonetheless, we remain skeptical about measuring “jobs saved” – the last refuge for policies that appear to create few if any new jobs. But who knows? The job some future politican claims to have saved due to the stimulus money may be yours.

Fergus Cullen ([email protected]) is Executive Director of the Yankee Institute, a Hartford think tank that advocates free market solutions to public policy issues. The full report is available at yankeeinstitute.org

Yankee Staff

Yankee Institute is a 501(c)(3) research and citizen education organization that does not accept government funding. Yankee Institute develops and advances free-market, limited-government solutions in Connecticut. As one of America’s oldest state-based think tanks, Yankee is a leading advocate for smart, limited government; fairness for taxpayers; and an open road to opportunity.

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