Arnold Kling  

Stimulus Bill or Reparations Bill?

Regulatory Arbitrage... Sense from Frank Rich...

I think that President Obama set the bar ridiculously low when he said that 75 percent of the stimulus should kick in within by the end of 2010, but the House bill did not even get over that bar. Why is the stimulus bill so filled with non-stimulus while it omits real stimulus measures, such as cutting payroll taxes?

I think the answer is that it is a reparations bill, not a stimulus bill. People who pay income taxes tend to vote Republican. People who live off taxes tend to vote Democratic. To the Democrats, the Bush tax cuts were a heinous evil, comparable to Germany's violation of Belgian neutrality in World War I. Now, they are demanding reparations, with hundreds of billions of dollars to be paid into teachers unions and other members of the coalition that won the election.

Most of the bill makes no sense from a stimulus perspective. But all of it makes sense from a reparations perspective.

[UPDATE: comments have been turned off. Apparently, some other blogger decided that my reference to "reparations" was a reference to reparations from slavery and hence a reference to the color of President Obama's skin. That had not occurred to me. I really was thinking about the Treaty of Versailles. But the comments were getting ugly.]

Comments and Sharing

CATEGORIES: Fiscal Policy

COMMENTS (36 to date) writes:

I do not understand why people are having diffculty understanding. The number of unemployed people (11.6 million) and the unemployment rate (7.6 percent) rose in January. Over the past 12 months, the number of unemployed persons has increased by 4.1 million. The Department of Labor reported today that nonfarm payroll employment fell sharply in January (-598,000) and the unemployment rate rose from 7.2 to 7.6 percent. Payroll employment has declined by 3.6 million since the start of the recession in December 2007, .... most of this mess happening only in past three months! And some wonder Obama is pushing so hard for a stimulus package. Is the Herbert Hoover approach, do nothing, all we need, leading us to a twelve year depression ??

cm writes:

Yes, everyone is wondering why Obama is pushing for a stimulus plan that won't stimulate.

Richard writes:

"People who pay income taxes tend to vote Republican. People who live off taxes tend to vote Democratic."

That point is very powerful rhetorically. But is it true? Do we have direct evidence? And if true, doesn't it contradict Bryan's thesis in The Myth of the Rational Voter?

Lord writes:

Spending is stimulus and will stimulate better than tax cuts because much of tax cuts will be saved. Spending will be spent once by the government, taxes will be paid on it as income making it cheaper than its nominal value, and as it will go largely to those without other work, they will spend much of it again. Being the size it is however, it will go towards reducing job loss rather than creating jobs. Unemployment will still rise. A good part of the spending will go towards imports but more imports will also lead to more exports. The best parts are those that address the immediate problem and reduce the pain like unemployment and state and local aid, and the longer term development projects such as the electric grid, green investments, and health IT. You are right about one thing though. The Bush tax cuts of 2001 were the most poorly designed stimulus ever conceived by the human mind. So poorly designed that not even extremely lose monetary policy could do much and a second stimulus in 2003 was necessary. It truly was a placebo, appearing to do something and costing a fortune but amounting to less than nothing.

Soylent writes:

"That point is very powerful rhetorically. But is it true?"

Not only no, but hell no!

With few exceptions the states that recieve more federal spending than they pay in federal taxes are red states; Colorado and Nevada being the only notable exceptions that I can see.

David writes:

A tax cut program is one that supports expense reduction and investment. Conversely, most companies in today's economy are having a top line problem, which is spending by customers. Based on these views, I believe the stimulus plan should weigh towards top line growth, as spending is needed more than expense cutting. Companies already know how to cut expenses very well, as they are currently doing so in droves cutting heads and business units. Further government contribution to corporate expense cutting will not spur hiring because companies are already cutting back heavily due to reversing revenue growth. They will continue to cut the bottom part of the income statement as long as the top part does not grow, regardless of tax policy.

Spending, unfortunately, is the stimulation that this economy requires. Not to say, though, the solution should be comprehensive and include many types of stimulating efforts, including tax cuts and mortgage refinancing.

Steve Reilly writes:

You mean if the Bush tax cuts hadn't passed, you think the Democrats wouldn't have added stuff to the stimulus package that benefits their constituents? That follows from your reparations thesis, and it strikes me as implausible.

dearieme writes:

"Is the Herbert Hoover approach, do nothing..": Mr Kling, am I allowed to call that commenter an ignorant plonker?

MattYoung writes:

Alice Rivlin agrees (politely) with you. I agree. Robert Rubin probably agrees. The rest of the economic gang are likely hiding out on this issue.

Develop this idea.

Zac writes:

"People who pay income taxes tend to vote Republican. People who live off taxes tend to vote Democratic." - not true. Regardless of income's effect on party affiliation, very few people are "living off taxes." If everyone who paid income taxes voted Republican I doubt the democrats would ever win any elections. We should all remember to be careful about the things we say - else come off sounding rather foolish. That sounds like something Rush Limbaugh would say - blatantly partisan and false.

Also I do not buy the idea about 'reparations.' It suggests that, as Steve Reilly pointed out, the stimulus package would be different if tax cuts hadn't been passed. Seems implausible.

Jay-D writes:

"Reparations" I like the way you use that word. Code much

Jeff writes:

I think this is a very good commentary. I disagree with the previous reader. Another good article I read on this recently was an another side, I think,

Brad Hutchings writes:

Obama would clinch his fist and say "yeah, that's the point". The keys to weathering this storm are to let the whiners whine, let the Bush haters run out of energy hating George Bush, delay the reparations package as long as possible, and just wait things out. The good news is that the House-Senate conference will explode the cost of the bill by choosing both spending and tax cuts, which will make the bill that emerges totally unpalatable to any Republican who doesn't plan to switch parties. Meanwhile, the notion that there is any consensus among the tea leaf readers, er, economists is becoming more laughable by the day. This is becoming much more of a political storm to weather than an economic one.

ThaddeusMcMonster writes:

Remind me again, was it you or Bryan who was big into the "type M" versus "type C" arguments?

ThomasL writes:


There is a serious flaw in using this kind of stimulus to affect unemployment. Quoting Hayek:

"The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand which must cease when the increase of the quantity of money stops or slows down, together with the expectation of a continuing rise of prices, draws labour and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate - or perhaps even only so long as it continues to accelerate at a given rate."

Even if it succeeds in creating jobs, it does so by distorting the labour markets, creating jobs where no jobs were needed or wanted by the private sector. That could be because a job is not useful at all, or it could simply be that that arena was fully staffed for the normal level of activity, and only needed a boost because of increased demand (think stores hiring lots of temporary shop clerks over the holidays).

As soon the holiday season passes--ie, the public funding is removed--those distortions will collapse, leaving all those people unemployed again. If you believe the stimulus supporters' claims, funding will be over within two to three years.

One line version: if the government hires people to do jobs no one in the private sector was willing to pay them to do, as soon as the government stops paying them they'll be out of a job.

Gaumata writes:

Hear hear. What was community organizing ever about but welfare payments and growing government?

FGH writes:

And let's not forget Isabel Paterson's ("The God of the Machine") observations, penned in 1943:

“[P]rofessional politicians, and persons with unearned incomes, are distinguished by the eagerness with which they attach themselves to the political payroll, or turn their political position to incidental gain. They are not aware of any objective in political life except parasitism. The parasitical view of politics was formulated unconsciously when the argument began to be heard that larger salaries, perquisites, more ostentatious public buildings, embassies and uniforms must be provided to maintain dignity of office. If a position is rated by its expense or display, obviously it must be deemed wanting in intrinsic dignity or worth. The ambassadors who feared that in ordinary clothes they might be taken for waiters were probably right. No one would have taken Franklin, Adams or Jefferson for a lackey. …
“The cost and display of government is always in inverse ratio to the liberty and prosperity of the citizens, as with the impoverished nation and magnificent monarchy of Louis XIV. …
“Further, political power has a ratchet action: it works only one way, to augment itself. A transfer occurs by which the power cannot be retracted, once it is bestowed. In the lowest illustration of this, a candidate for office may promise the voters that he will reduce taxes, or the number of offices, or the powers of office. But once he is elected, he can use the taxes, the officeholders, or the powers to ensure re-election; therefore the motive of the promise is no longer operative. By cutting down expenditure or the number of officeholders or graft, he will certainly create enemies, so the reverse motive, impelling powers him to evade his promise, is doubled. The voter can only vote the incumbent out; but the next officeholder will come into those augmented, and still be harder to get rid of in return. The difficulty of taking back powers once granted is illustrated in the repeal of the Prohibition Amendment; although it was demanded and carried by overwhelming sentiment of the citizens, the article of repeal contained a proviso which would retain numerous federal jobs; it was impossible to make a clean sweep of the pernicious usurped power."

Dobby writes:

The government spending by Obama and the Democrats is not stimulous. It's just payoffs that will get us deeper into debt. They are trying to put out a fire by pouring gasoline on it. We are headed for a lost decade just like Japan.

Milton Friedman was so right in this interview. Scary right.

geokstr writes:

Zac writes:
"People who pay income taxes tend to vote Republican. People who live off taxes tend to vote Democratic." - not true.

This premise was simply stated imprecisely. Let's put it this way instead - People whose income comes primarily from government or for whom higher government spending or greater governmental power would likely increase their own incomes and/or power, tend to vote Democratic, and those whose income comes mostly from the private sector tend to vote Republican.

That means that the entire teaching profession at all levels, including universities and all their staffs (and all the students they've managed to indocrinate over the last 30 years), all governmental employees at local, state and federal levels, a hefty chunk of the legal profession, all those receiving benefits from the government, including all those on welfare, food stamps, government pensions, medicare/medicaid, social security recipients, governmental contractors in all sectors of the economy, and more I haven't thought of. That pretty much explains nearly every group that went for Obama. All of them have a vested interest in growing government to take care of them. Sure most of them also pay taxes but it's from money they got from government in the first place.

At the 1972 Democratic convention, over 70% of all the delegates got most or all of their income from government in some form or another. I'm sure it's well over 90% by now.

It has been said that democracy contains the seeds of its own destruction. That comes at the point when the majority of voters learn that they can vote themselves benefits from the public treasury. We hit that that "tipping point" this last election, obviously.

GreySwan writes:

Actually, savings don't disappear. When people save, in a bank account for example, these savings are then loaned out to businesses and other people as INVESTMENTS. Investments then produce a recurring value for years in the future. On the other hand, when I go out and spend money on a brand new tv, some of this money does go to investment, but much of it goes to the physical cost of construction/transportation of that TV, and thereby has less recurring value in the future.

Jim Durbin writes:

When you're counting federal dollars to red states, it's important to evaluate how much is military spending and transportation.

If you're building a road in fly-over country to deliver food to New York City, is it really accurate to say that the red state is not paying its share of taxes? Would you say that Alaska, who gets paid for its natural resources, also falls in that category? What about states that send more soldiers per capita? House military installations?

Huge amounts of money is pooled in blue states. It doesn't mean that every rich person who pays a lot in taxes in liberal.

It's a poor argument, designed to create a moral superiority for blue states by blurring the lines.

Jimmie writes:
Spending is stimulus and will stimulate better than tax cuts because much of tax cuts will be saved.

Let's assume that this is true (a tough assertion considering most of the rest of your post isn't). Where will this money go when it's saved/ Why into banks and other financial institutions - the very places were were told four months ago that we needed massive injections of cash.

Except with tax cuts, the benefit for that saved money goes directly to the citizens who invested the money instead of giving the government direct control over the banks.

So, banks get more cash they can use to lend and citizens get investment returns that will be taxed less harshly, thus enticing them to save even more.

Yeah, I can't imagine why we'd want that to happen. better to give that money to non-profit organizations 9that don't pay taxes), activist groups (who will give it to political campaigns), and government programs that take at least half of each dollar off the top in administrative overhead. That's a much better way of getting our fiancial system back on its feet.

DanM writes:


Would an example of that mis-direction of stimulus be the forwarding of union labor over non-union labor?

See -

Vercingetorix writes:

Regardless of income's effect on party affiliation, very few people are "living off taxes."

Every government employee, by definition, lives off taxes, and every union member lives off a government-enforced monospony of labor. So, actually, tens of millions of people live off taxes across the board in municipal, city, state, and federal jobs, and subsidized private sector jobs.

Likewise, the federal spending in a state is a nonsequitar - Alaska, for instance, has about a million people, and is home to lots of federal spending, such as military and requisite energy spending. Of course, it's going to have a high ratio of federal dollars in compared to out. Then there are the federal programs that liberals supposedly support: against poverty, social security, medicare, disaster relief, agriculture, mining and manufacturing.

Besides, federal spending in real dollars in red states are well and truly dwarved by the blue-state's own large and insolvent state and city governments, which is again Kling's point: people that live off the government vote Democratic.* In this context, that example is plainly stupid.

"Spending is stimulus and will stimulate better than tax cuts because much of tax cuts will be saved."

Savings are quite plainly needed, seeing as how this whole mess was caused by excessive borrowing. A trillion dollars in spending has to be repaid = more taxes, less savings AND spending. Borrowing MORE to fix extravagant borrowing is slack-jawed idiocy. Sorry, but the world don't work that way, pal.

* For every member of the military, I give you the SEIU and Teacher's Union.

tsotha writes:

I think this blue state/red state tax thing can be laid to rest. The bank bailout, which went mostly to the blue East coast, cost more than the red states will get in largess from the treasury for generations.

New Frontiersman writes:, Lord -- can you people read?

The point in the original post is that well over 25% of the bill isn't getting spent until 2011. Money that isn't getting spent until 2011 provides no stimulus whatsoever until 2011. That is, over 25% of the "stimulus" bill is utterly, completely worthless as stimulus.

It doesn't matter how much more effective spending is than tax cuts at stimulating in theory. A tax cut today will stimulate at least somewhat today, if even only 1% of the cut is spent. Spending in 2011 will not stimulate today at all.

If this is an emergency that needs stimulus now, then, a tax cut worth 25% of the current bill is worth infinitely more than the spending in 25% of the current bill.

We accordingly see that the stimulus is an excuse for the bill's spending, not the reason.

peterike writes:

"And some wonder Obama is pushing so hard for a stimulus package. Is the Herbert Hoover approach, do nothing, all we need, leading us to a twelve year depression ??"

Would that Hoover had done "nothing." Had he done nothing, there might never have been a Great Depression in the first place. Had FDR done nothing, it would have ended quite a bit sooner as well.

Much good could be done simply by changing some rules, such as the mark-to-market fiasco. There are changes that would cost exactly nothing and do more good than all the fat pork in Obama's palm-greasing bill.

celebrim writes:

"Is the Herbert Hoover approach, do nothing, all we need, leading us to a twelve year depression ??"

I agree that we don't need a Herbert Hoover approach, but I think you need to go back and read your history to determine what the 'Herbert Hoover' approach actually is, and particularly, whether it was Hebert Hoover and not FDR's policies that were the principle cause of extending the depression.

I know wiki is hardly the authority I would like, but let's start there:

"After his successful election in November 1928, Hoover entered office with a plan for reform of the nation's regulatory system. A dedicated Progressive and Reformer, Hoover saw the presidency as a vehicle for improving the conditions of all Americans by regulation and by encouraging volunteerism. Long before he entered politics he denounced laissez-faire thinking.[18] As Commerce Secretary he had taken an active pro-regulation stance. As President, he helped push tariff and farm subsidy bills through Congress. As President, he helped push tariff and farm subsidy bills through Congress.

Hoover expanded civil service coverage of Federal positions, canceled private oil leases on government lands...closed certain tax loopholes for the wealthy; doubled the number of veteran's hospital facilities; ...wrote a Children's Charter that advocated protection of every child regardless of race or gender; built the San Francisco – Oakland Bay Bridge; created an antitrust division in the Justice Department; ...proposed a federal Department of Education; ...advocated fifty-dollar-per-month pensions for Americans over 65 (not enacted); chaired White House conferences on child health, protection, homebuilding and homeownership; began construction of the Boulder Dam (later renamed Hoover Dam); and signed the Norris-La Guardia Act that limited judicial intervention in labor disputes."

Sound familiar? Hoover was a typical progressive of his day, and when the depression hit, he advocated typical progressive measures.

"Congress approved the Smoot-Hawley Tariff Act in 1930. The legislation, which raised tariffs on thousands of imported items, was signed into law by President Hoover in June 1930. The intent of the Act was to encourage the purchase of American-made products by increasing the cost of imported goods, while raising revenue for the federal government and protecting farmers. However, economic depression now spread through much of the world, and other nations increased tariffs on American-made goods in retaliation, reducing international trade, and worsening the Depression...President Hoover, in 1931, urged the major banks in the country to form a consortium... Hoover encouraged the member banks of the NCC to provide loans to smaller banks in order to prevent them from collapsing. Unfortunately, the banks within the NCC were often reluctant to provide loans, usually requiring banks to provide their largest assets as collateral. It quickly became apparent that the NCC would be incapable of fixing the problems it was designed to solve, and it was abandoned in favor of the Reconstruction Finance Corporation...In response, President Hoover and Congress approved the Federal Home Loan Bank Act, to spur new home construction, and reduce foreclosures. The plan seemed to work, as foreclosures dropped, but it was seen as too little, too late.

Prior to the start of the Depression, Hoover's first Treasury Secretary, Andrew Mellon, had proposed, and saw enacted, numerous tax cuts, which cut the top income tax rate from 73% to 24%. When combined with the sharp decline in incomes during the early depression, the result was a serious deficit in the federal budget. Congress, desperate to increase federal revenue, enacted the Revenue Act of 1932. The Act increased taxes across the board, and the percentage increased with income, to near pre-1928 levels for top income earners. It also implemented a 13.75% tax on corporations.

The final attempt of the Hoover Administration to rescue the economy was the passage of the Emergency Relief and Construction Act which included funds for public works programs and the creation of the Reconstruction Finance Corporation (RFC) in 1932. The RFC's initial goal was to provide government-secured loans to financial institutions, railroads and farmers."

Again, this should all sound very familiar. It didn't work. Most of it in fact made things worse. As the wiki account notes, FDR actually campaigned on a laisse-faire platform: "Franklin D. Roosevelt blasted the Republican incumbent for spending and taxing too much, increasing national debt, raising tariffs and blocking trade, as well as placing millions on the dole of the government. Roosevelt attacked Hoover for "reckless and extravagant" spending, of thinking "that we ought to center control of everything in Washington as rapidly as possible," and of leading "the greatest spending administration in peacetime in all of history." Roosevelt's running mate, John Nance Garner, accused the Republican of "leading the country down the path of socialism."

Once in office however, FDR did a 180, and decided to expand Hoover's programs.

That didn't work either. In fact, by many estimates, FDR's efforts extended the great depression by at least 4 more years.

JohnMc writes:
Lord writes:

Spending is stimulus and will stimulate better than tax cuts because much of tax cuts will be saved. Spending will be spent once by the government, taxes will be paid on it as income making it cheaper than its nominal value, and as it will go largely to those without other work, they will spend much of it again.

When the majority of the funds to be spent is to be spent ON government, by THE government no tax revenues accrue to the government period. Or don't you know that the government does not pay taxes on products and services it buys?

The government by doing the spending also withdraws from the pool of available capital for productive work to go into government programs. The impact is inflated by the waste associated with it. Like for example out of TARP 1, where did $78B go missing? And yet few are asking for answers.

Get your head out of the sand and smell the manure that is being spread.

Troll Feeder writes:

jimmie @ 9:30 plus others:

Thank you. Well said. +11ty.

I am by now thoroughly sick of writing what you wrote, but I am encouraged to see that the idea does live, and that other people do arrive at it on their own.

Preach it, for the world is dumb.

hitnrun writes:

"Spending is stimulus..."

Even granting this theory (which is provably wrong), it still doesn't excuse the fact that the overwhelming majority of the bill's spending will come years from now.

Democrats know this - any idiot can see it - which is why the entire body of support for the bill comes in a few peeps of sophistry on blog comments, British newspapers, and E.J. Dionne.

Liberals are Parasites writes:

It is absolutely TRUE that most people who earn over $100,000 vote Republicam, while those who earn under $30,000 vote Democrat.

The idiot who shows the bogus data that 'red states' are burdens and 'blue states' are contributors is a gullible fool. Even in Manhattan, the 18% that vote Republican are the wealthy 18% (Trump, Bloomberg, Giuliani, and Hedge Fund guys).

So yes, Democrat = Moocher.

James Feldman writes:

Mr. Kling, I am a very big fan of your writing, here and elsewhere. But this is untrue, blatantly untrue, and pointlessly inflammatory. It expresses a lack of understanding several basic truths about our political system which I find implausible in a person who shares a blog with Mr. Caplan. It is unworthy of your scholarship, and beneath what I hope is your dignity.

I will continue, I hope, to enjoy and profit from reading your work.

cubanbob writes:

First no state in absolute terms pays in more than it gets, that is why we have a deficit to begin with. Secondly and more important, the money belongs to the individual taxpayer not to the state.
California sends more to the treasury than a red state, but the taxes are paid by a small minority of the California taxpayers, mostly in Republican areas. When half of the adults in this country pay no meaningful amount of income taxes, then there is no other way to express it but they are parasites.
Of the other half, only have of that half pay the bulk of the income taxes in this country. Subtract the government employees and the tax consumers and most adults in this country are freeloaders.

Perhaps its time to limit the vote (for the House of Representatives) to net taxpayers. If Biden thinks its patriotic to pay taxes, then why not have everyone pay their per capita share?

Albie writes:

All of which means little. The incoming Republican Congress after the 2010 election will bury most of the Stimulus bill's outyear spending anyway. Good creative politics for the moment, though.

st writes:

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