Fiscally Responsible Stimulus

In light of the
current state of the economy, it appears likely that Congress will pass another
stimulus package…

The Committee for a Responsible
Federal Budget recognizes that there is a strong enough risk of a prolonged
recession that a fiscal stimulus package may well make sense. Given the many
risks associated with a significant downturn, it makes sense to err on the side
of caution in determining whether more stimulus is appropriate. Assuming
Congress proceeds with plans to offer some type of stimulus package, CRFB
offers three recommendations.

1) The package should be designed to accomplish economic, not
political, objectives. There is
already a good deal of momentum behind the idea that there should be another
stimulus package and the size of this package seems to be growing by the week.
It is critical that this not become a political package filled with Members’
favorite items or unrelated spending and tax initiatives, dress up as stimulus.

Congress has a poor recent track
record on this point: the September $700 billion dollar package included tens
of billions of dollars in unrelated giveaways like tax breaks for sales of
wooden arrowheads and a credit for turning chicken waste into jet fuel. The package also included more substantive
measures like the $80 billion patch on the Alternative Minimum Tax, which never
received the full and open debate it deserved because it was rushed through as
part of an emergency spending measure. If Congress passes a second
stimulus proposal, CRFB urges it to pass a “clean” bill that is free of
unrelated provisions and political bargaining chips.

2) Borrowing should only be used for temporary measures. Pay-as-you-go
(PAYGO) rules need not apply to temporary fiscal stimulus-in fact, any
short-term or immediate offsets would defeat the purpose of fiscal stimulus,
which relies on deficit spending to help boost aggregate demand and GDP.

However, if the federal
government borrows too much, it risks creating serious long-term damage to the
nation’s economy. While deficits can
stimulate growth and encourage consumption in the short-run, they stifle
long-run growth by crowding out investment.
Interest payments also crowd out other areas of the budget, and present
a particularly worrisome situation if they are growing faster than the economy.
If the new debt associated with the stimulus becomes permanent, we will pay
interest on that borrowing indefinitely
in return for temporary employment and consumption gains. The long-term fiscal
picture is already quite bleak; and it would be a mistake to make the situation
worse by prolonging stimulus policies and borrowing past the window of need.

Accordingly, CRFB strongly urges
Congress to make all parts of any stimulus package temporary. The stimulus
should not include outlays or tax cuts that extend beyond the period in which
they are expected to mitigate the effects of an economic downturn. Permanent
policies developed to encourage economic growth, such as fundamental tax reform
or investment spending on areas such as energy, infrastructure and research,
should be evaluated on their own merits and paid for rather then
deficit-financed. Part of the stimulus agreement should be that Congress will
find corresponding offsets for any tax or spending policies that are passed as
part of a stimulus package, but have costs beyond the period when the economy
is in recession.

3) The creation of a mechanism to address fiscal imbalances should be
included with any stimulus package. We strongly recommend that any stimulus
package include a mechanism to help start the process of addressing the
nation’s long-term budget imbalances. As
the economy struggles to gain its footing, it is not the time to implement the
types of policies-raising taxes and cutting spending-that will be necessary to
re-balance the country’s short- and long-term budget. But a stimulus package
should put in place the mechanism to begin crafting a longer-term budget plan.
This could take the form of a Members Working Group, or a Task Force to present
recommendations that could be implemented once the economy has stabilized. Such
an action would send an important signal to markets and our creditors that the
current economic crisis is not being viewed as an excuse to borrow endlessly
without a credible plan to pay down the debt in the future.

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