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How Much of the Stimulus Bill Will Pay for Itself?

2 min readBy: Gerald Prante

Throughout the eight years of the Bush administration, a phrase often mentioned by some in the administration and more frequently by conservative commentators was that the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. cuts Congress passed and Pres. Bush signed would stimulate the economy enough to pay for themselves. The reality is that some of the static cost of the tax cuts (some of which were supply-side, some of which were merely windfalls) were recovered by greater economic output, but it was far from recovering their full costs.

Now we are in a situation of Keynesian-style policies being proposed by those who argue that government spending and some targeted tax cuts that are essentially like rebate checks are needed to spur the economy to increase aggregate demand. They argue that the free market would take too long to sort everything out. The cost of the stimulus bill being proposed has been quoted as being just short of $1 trillion. But just as a given tax cut’s static cost never equals its actual cost, this $1 trillion figure being quoted will not equal the true cost to the Treasury over time.

On the one hand, Keynesians would argue that since the economy will grow in response to this stimulus, revenues will be higher than what they would have otherwise been. On the other hand, if this plan drives up interest rates due to greater borrowing, the crowding-out effect could harm economic growth (and revenues) in the longer-term. So my question to those in the econ blogosphere and the supporters and critics of this plan is this: assuming some reasonable discount rate, what is the net present value of the costs to the U.S. Treasury from this stimulus plan? (Maybe the cost is even negative in that the stimulus will grow revenues enough in the short-run relative to what would have occurred in the absence of the stimulus.)

Note: It should be noted that the impact of a policy on the Treasury’s bottom line is only one dimension of the cost-benefit calculation of whether a policy is good or bad. It is just the one that is cited most frequently.