In weighing further measures to bolster the U.S. economy, Congress must recognize that real, sustained growth comes from the work, savings and investment of American families and businesses not from the federal government.
We can, and should, take immediate action to address a weak economy with initiatives that produce lasting economic gains. What we cannot do is borrow and spend our way into prosperity, building up huge federal deficits and calling it stimulus.
The intent of a second so-called stimulus as advertised by the Democratic majority and President-elect Barack Obama is to get the economy back on track. But there is no evidence another huge infusion of federal dollars will stimulate anything more than a temporary jolt in consumer spending, after which the economy returns to its previous course.
The only lasting gains of stimulus spending will likely be in higher deficits and debt both of which are soaring. In fact, after three straight years of declines, the deficit this past year more than doubled, to $455 billion. If the Democratic Congress passes its additional spending package reported to have ballooned to between $500 billion and $750 billion the deficit will likely blow right through the $1 trillion mark this year the largest ever in nominal terms, and the largest as a share of the economy since World War II.
So while the long-run costs of stimulus spending packages are real, the long-run benefits are, at best, highly suspect. The reasons these temporary fiscal spending packages fail to fix the economy are many. Key among them: They do nothing to address the core problems of our current financial crisis and economic weakness; they do nothing to change the main factors driving our long-term growth trajectory; and they do nothing to promote real growth.
For the most recent example of stimulus failure, we can look to the results of the tax rebates enacted earlier this year. Instead of spending the extra cash, as proponents had hoped, most recipients simply paid off bills or saved the money. The stimulus boosted consumer spending by less than $20 billion but added nearly $80 billion to the national debt.
For the most haunting example of stimulus failure, we can look to Japans lost decade of the 1990s. With its economy in a sharp slowdown, the Japanese government pursued an aggressive round of fiscal stimulus packages after 1993. The spending, mostly concentrated on infrastructure, eventually pushed Japans budget deficit to nearly 10 percent of gross domestic product by 1999, while total government debt increased to 130 percent of gross domestic product. Looking back on that decade, the Economist magazine concluded: Japans policymakers … appear to have followed the Keynesian textbook … yet, the economy is still flat on its back.
In short, the folly of relying on stimulus to correct a weak economy is the belief that the federal government can generate real, sustained growth and job creation. Of course, it cannot. Government doesnt create new jobs and prosperity only real investment in the private sector, and expansion of U.S. economic activity, do. Put simply, because every dollar Congress spends must first be taken from the economy, Congressional spending cant grow the economic pie it just redistributes the slices.
There are legitimate steps Congress can take to help the American economy in both the near and long term. These include the following:
Provide Help to Those Who Need It. With the economy still shedding jobs, it makes sense to extend unemployment benefits, as we have already done.
Support Real Policies for Growth. Fast-acting tax policy such as allowing expensing on all new investments would boost incentives to expand business operations and create jobs. In addition, lowering the corporate income tax rate currently the second highest in the industrialized world would help attract investment in the U.S., and reduce the incentives to shift business operations, and jobs, overseas.
Provide Tax Certainty. In its most recent budget, the Democratic majority assumed the largest tax increase in history by letting a scheduled tax increase in 2010 occur, which would increase taxes on investment, savings, businesses, families and workers. This threat is stifling business investment and job creation today because of the uncertainty in tax laws. Congress should permanently extend the current tax laws and drop tax increases. This would serve as a de facto tax cut, increasing the after-tax rate of return on investment and unlocking billions in private, idle capital.
Help Stabilize Financial Markets. Existing Securities and Exchange Commission regulations, or the lack thereof, are aggravating the sharp declines in asset values and the confidence in markets. Current mark-to-market accounting rules, last years repeal of the uptick rule, and the opaque nature of the credit default swaps market, when combined, are aggravating the distress in our financial markets and our economy.
The federal government can help stabilize these markets by reforming the mark-to-market accounting rule to require a rolling average, restoring the uptick rule to put a brake on short selling of stocks to manipulate stock prices, and providing greater transparency in the CDS market.
Stop Over-Selling What Congress Can Do. Congress must stop pitching the false notion that we can simply spend (then tax and borrow) our way to prosperity. Last year, Washington increased federal spending by 8.3 percent more than twice the growth of our economy or Americans wages; this included 11,000 pork-barrel earmarks at a cost to taxpayers of $17 billion. If as Washington likes to suggest higher government spending leads to stronger economic growth, our economy today would be the strongest in our nations history.
Get Spending Under Control and Address the Long-Term Spending Crisis. Congress must also get control of its own spending particularly wasteful earmarks, and the unsustainable growth rate of our largest entitlement programs. Our three largest entitlements Medicare, Medicaid and Social Security have a current unfunded liability of $34 trillion; and every year we fail to act, we dig ourselves another $2 trillion-$3 trillion in the hole. Without reform, these programs will not only grow themselves right into extinction they will impose a crushing blow to our budget and economy in the process.
In short, simply shoveling ever more money out the door will do nothing to address the core problems in our economy; what it will do is add hundreds of billions of dollars to federal deficits and debt, increase U.S. borrowing costs, serve as justification for even more tax hikes and likely lead to an even deeper, longer economic crisis in the future.
I hope Washington can come together in a bipartisan fashion to address our greatest economic and fiscal challenges by: keeping taxes low so our economy can thrive, reforming regulations that are contributing to problems in financial markets, getting our spending under control and ending the wasteful practice of earmarking, and addressing the looming entitlement crisis. Such efforts would assure financial markets in the U.S. and around the world that we are serious about promoting real growth both today, and well into the future.
Rep. Paul Ryan (R-Wis.) is ranking member of the Budget Committee.