Even more myths and falsehoods surrounding the economic recovery planFebruary 5, 2009 6:39 PM EST ››› MEDIA MATTERS STAFF
Media Matters for America previously identified numerous myths and falsehoods advanced by the media in their coverage of the American Recovery and Reinvestment Act. As debate on the bill continues in Congress, other myths and falsehoods advanced by the media about the recovery package have risen to prominence. These myths and falsehoods include: the assertion that the bill will not stimulate the economy -- including the false assertion that the Congressional Budget Office (CBO) said the bill will not stimulate the economy; that spending in the bill is not stimulus; that there is no reason for stimulus after an economic turnaround begins; that corporate tax rate cuts and capital gains tax rate cuts would provide substantial stimulus; and that undocumented immigrants without Social Security numbers could receive the "Making Work Pay" tax credit provided in the bill.
In a February 1 article, The Associated Press reported an assertion by Senate Minority Leader Mitch McConnell (R-KY) that the recovery bill will not stimulate the economy without noting that the CBO disagrees. ABC World News anchor Charles Gibson echoed this assertion during his February 3 interview with President Obama, stating: "And as you know, there's a lot of people in the public, a lot of members of Congress who think this is pork-stuffed and that it really doesn't stimulate." Additionally, on the January 28 edition of his show, nationally syndicated radio host Rush Limbaugh allowed Rep. Eric Cantor (R-VA) to falsely claim of the bill: "Even the Congressional Budget Office, controlled by the Democrats now, says it is not a stimulative bill." Fox News host Sean Hannity repeated this claim on the February 2 broadcast of Fox News' Hannity, asserting that the CBO "say[s] it's not a stimulus bill."
In fact, in analyzing the House version of the bill, H.R. 1, and the proposed Senate version, the CBO stated that it expects both measures to "have a noticeable impact on economic growth and employment in the next few years." Additionally, in his January 27 written testimony before the House Budget Committee, CBO director Douglas Elmendorf said that H.R. 1 would "provide massive fiscal stimulus that includes a combination of government spending increases and revenue reductions." Elmendorf further stated: "In CBO's judgment, H.R. 1 would provide a substantial boost to economic activity over the next several years relative to what would occur without any legislation."
Several media figures, including CNN correspondent Carol Costello, CBS Evening News correspondent Sharyl Attkisson, and ABC World News anchor Charles Gibson, have all uncritically reported or aired the Republican claim that, in Gibson's words, "it's a spending bill and not a stimulus," without noting that economists have said that government spending is stimulus. Indeed, in his January 27 testimony, Elmendorf explicitly refuted the suggestion that some of the spending provisions in the bill would not have a stimulative effect, stating: "[I]n our estimation -- and I think the estimation of most economists -- all of the increase in government spending and all of the reduction in tax revenue provides some stimulative effect. People are put to work, receive income, spend that on something else. That puts somebody else to work." Additionally, Dean Baker, co-director of the Center for Economic and Policy Research, has said, "[S]pending is stimulus. Any spending will generate jobs. It is that simple."
In a January 28 Wall Street Journal article, reporter Naftali Bendavid uncritically reported congressional Republicans' criticism of the proposed economic stimulus bill on the grounds "that much of the money in the package wouldn't be spent until 2011 or later, when a recovery is likely to be already under way." CNBC anchor Melissa Francis and MSNBC anchor Contessa Brewer repeated this criticism on the January 29 edition of MSNBC Live when Francis stated: "Only 64 percent of the money is going to be spent within the next 19 months," and Brewer replied, "And how do you justify that?" Francis responded: "How do you justify that is the real question." Limbaugh also suggested that stimulus would not be necessary after a turnaround begins in a January 29 Wall Street Journal op-ed in which he asserted that "[t]he average recession will last five to 11 months; the average recovery will last six years. Recessions will end on their own if they're left alone. What can make the recession worse is the wrong kind of government intervention." None mentioned the position of many economists that a stimulus package will be necessary even if the economy begins to turn around.
In his January 27 testimony, Elmendorf said that fiscal stimulus in 2011 or later would be effective in the current economic situation, in which economic output is projected to remain below its potential even after the beginning of the recovery. Elmendorf stated that unlike in ordinary "periods of economic weakness" that "are fairly short-lived," "CBO projects that economic output will remain significantly below its potential for several more years, so policies that provide stimulus for an extended period of time may be appropriate." From Elmendorf's testimony:
Timing. The economic effects of fiscal stimulus should occur during the period of economic weakness, all else being equal. When, as now, a recession is clearly already under way and aggregate demand is declining, it is better if stimulus affects spending quickly in order to mitigate further deterioration in the economy. Different types of policies may differ greatly in how quickly they can be implemented.
Because most periods of economic weakness are fairly short-lived, it is generally preferable that stimulus policies be short-lived. Currently, however, CBO projects that economic output will remain significantly below its potential for several more years, so policies that provide stimulus for an extended period of time may be appropriate. Indeed, a fiscal stimulus that ends before the economy has started to regain its footing runs the risk of exacerbating economic weakness when the stimulus ends.
Likewise, in a January 27 blog post, New York Times columnist and Nobel laureate Paul Krugman wrote:
It's not a problem if some or even most of the stimulus arrives after the official recession, as determined by the NBER, is over. Why? Because in modern recessions, unemployment keeps rising long after the NBER has determined, based on things like industrial production, that the recession proper is over. [emphasis in original]
In his January 29 Wall Street Journal op-ed criticizing the economic recovery plan and offering his own suggestions to stimulate the economy, Limbaugh advocated "cut[ting] the U.S. corporate tax rate ... in half" and "[s]uspend[ing] the capital gains tax for a year to incentivize new investment, after which it would be reimposed at 10%." During the January 29 edition of MSNBC Live, CNBC host Erin Burnett said that there were "interesting ideas" in Limbaugh's op-ed and his advocacy of "cutting the corporate tax" and "slashing capital gains" taxes were "serious things to say." However, many economists do not view corporate tax rate cuts and capital gains tax rate cuts as particularly "serious" or effective methods for stimulating the economy.
According to a January 2008 CBO report, "Options for Responding to Short-Term Economic Weakness," "a reduction in the corporate tax rate" is "not a particularly cost-effective method of stimulating business spending" because "[i]ncreasing the after-tax income of businesses typically does not create an incentive for them to spend more on labor or to produce more, because production depends on the ability to sell output." Indeed, Mark Zandi, chief economist and co-founder of Moody's Economy.com who was reportedly a McCain campaign economic adviser, included in 2008 written congressional testimony a table stating that every dollar spent through a "Cut in [the] Corporate Tax Rate" produces a GDP increase of only $0.30 -- the third least-efficient provision of the 13 he studied.
In the table included with his testimony, Zandi lists only "Accelerated Depreciation" and "Make Bush Income Tax Cuts Permanent" as having a lower "Fiscal Economic Bank for the Buck" than a "Cut in Corporate Tax Rate":
Additionally, in a January 23 report, Center on Budget and Policy Priorities (CBPP) research fellow Chye-Ching Huang wrote that "[n]umerous government and independent studies agree that corporate tax rate cuts provide relatively little 'bang-for-the-buck' as stimulus." Huang also wrote:
Cutting corporate tax rates on a temporary basis, as some have suggested, could even discourage investment. Cutting tax rates reduces the value of deductions that companies claim when they invest, make other purchases, pay wages, or depreciate equipment; for example, a $1,000 deduction is worth $350 at the current 35 percent corporate tax rate but would be worth only $250 at a 25 percent rate. If tax rates were cut on a temporary basis, companies would have an incentive to delay investments until the rate returned to 35 percent and deductions regained their lost value.
A permanent corporate rate cut would not have this disincentive effect. But neither would it provide timely stimulus, because it would provide no incentive for businesses to speed up investments. Firms could keep investments on the timeline already planned -- or even delay investments until the economy recovered -- and still get the benefits of the rate cut. Furthermore, a permanent rate cut, if deficit financed, would worsen the long-run budget outlook, which could hurt the economy over the long term.
Regarding the capital gains tax rate, according to a 2003 Congressional Research Service (CRS) report: "A capital gains tax cut appears the least likely of any permanent tax cut to stimulate the economy in the short run; a temporary capital gains tax cut is unlikely to provide any stimulus." Indeed, CRS stated under the heading of "Effects on the Economy" of "Permanent Tax Cuts" that "[t]here are reasons to expect that capital gains tax cuts would have the smallest stimulative effect on the economy of virtually any fiscal stimulus option."
Additionally, in a January 15 CBPP report, Huang and executive director Robert Greenstein wrote that "a capital gains tax cut is unlikely to release new resources that consumers would quickly spend":
Any windfall that taxpayers receive from a capital gains tax cut is unlikely to be spent quickly. The main beneficiaries of capital gains tax cuts would be high-income taxpayers, who own the vast majority of assets. For example, the Urban-Brookings Tax Policy Center has estimated that 98 percent of the benefit of temporarily cutting the capital gains rate in half would flow to the top 20 percent of households; 75 percent of the benefit would flow just to the top 1 percent of households.
The fact that capital gains tax cuts go mostly to high-income households makes them very poor stimulus, since high-income households are much more likely than low-income households to save rather than spend a significant portion of any new resources they receive. To boost consumer spending, stimulus resources should be directed at those who will spend these funds quickly. [emphasis in original]
On January 29, the Drudge Report's largest headline read "HILL REPUBLICAN: STIMULUS GIVES CASH TO ILLEGALS" and linked to an AP article that reported, based on a single anonymous source, that "[t]he $800 billion-plus economic stimulus measure making its way through Congress could steer government checks to illegal immigrants, a top Republican congressional official asserted Thursday. The legislation, which would send tax credits of $500 per worker and $1,000 per couple, expressly disqualifies nonresident aliens, but it would allow people who don't have Social Security numbers to be eligible for the checks." The Drudge Report did not remove the headline until roughly four hours after a revised version of the AP article made it clear that the claim made by the "top Republican official" was, in fact, false. Subsequently, several media figures and outlets repeated the false claim from the earlier AP article.
In fact, the recovery bill specifically precludes from eligibility for the Making Work Pay tax credit of $500 per individual and $1,000 per family "any individual unless the requirements of section 32(c)(1)(E) are met with respect to such individual." Section 32(c)(1)(E) of the Internal Revenue Code, which specifies requirements for individuals to qualify for the Earned Income Tax Credit, states:
(E) Identification number requirement
No credit shall be allowed under this section to an eligible individual who does not include on the return of tax for the taxable year --
(i) such individual's taxpayer identification number, and
(ii) if the individual is married (within the meaning of section 7703), the taxpayer identification number of such individual's spouse.
The law defines "taxpayer identification number" as used in 32(c)(1)(E) as "a social security number issued to an individual by the Social Security Administration":
(m) Identification numbers
Solely for purposes of subsections (c)(1)(E) and (c)(3)(D), a taxpayer identification number means a social security number issued to an individual by the Social Security Administration (other than a social security number issued pursuant to clause (II) (or that portion of clause (III) that relates to clause (II)) of section 205(c)(2)(B)(i) of the Social Security Act).
Therefore, the American Recovery and Reinvestment Act bars anyone without "a social security number issued to an individual by the Social Security Administration" from eligibility for Making Work Pay tax credits.
Previous media myths and falsehoods identified by Media Matters include the following:
Several media outlets and figures, including The Washington Post, CNN White House correspondent Ed Henry, and NBC senior White House correspondent Chuck Todd, have falsely suggested that a partial CBO analysis of the economic recovery plan -- reported by the Associated Press on January 20 -- was in fact a full analysis of the bill and falsely suggested that in that analysis, the CBO found that, in the words of the Post, "the majority of the money in the Democratic plan would not get spent within the first year and a half." In fact, the CBO report the AP highlighted initially conducted only a partial analysis and therefore did not reach a conclusion with respect to "the majority of the money" in the bill. Office of Management and Budget director Peter Orszag -- who formerly headed the CBO -- stated in a January 22 letter that the analysis addressed only "a component of the economic recovery proposal" and "did not address the overall package." CBO Director Douglas W. Elmendorf also wrote in a January 26 blog post that the "preliminary estimate that has been widely cited addressed only the budgetary impacts of an earlier version of the provisions contained in Division A, at the request of the House Committee on Appropriations."
The CBO subsequently released its "Cost Estimate" of H.R. 1, an analysis of the entire recovery plan as introduced in the House of Representatives, and concluded that 64 percent of the package would be spent by the end of the fiscal year 2010: "Combining the spending and revenue effects of H.R. 1, CBO estimates that enacting the bill would increase federal budget deficits by $169 billion over the remaining months of fiscal year 2009, by $356 billion in 2010, by $174 billion in 2011, and by $816 billion over the 2009-2019 period."
On the January 27 edition of CNN's Campbell Brown: No Bias, No Bull, host Campbell Brown and CNN chief business correspondent Ali Velshi repeatedly claimed that provisions in the economic recovery bill that extend food stamps and unemployment insurance payments are, in Velshi's words, "not stimulus." But the same day, Elmendorf stated in congressional testimony: "Transfers to persons (for example, unemployment insurance and nutrition assistance) would also have a significant impact on GDP. Because a large amount of such spending can occur quickly, transfers would have a significant impact on GDP by early 2010." Additionally, in 2008 congressional testimony, Mark Zandi -- the chief economist and co-founder of Moody's Economy.com, who was reportedly a McCain campaign economic adviser -- stated that "extending food stamps are [sic] the most effective ways to prime the economy's pump" and cited extending food stamps and unemployment insurance payments as having a greater "Fiscal Economic Bank for the Buck" than any other potential stimulus provision he analyzed, including temporary and permanent tax cuts.
During Fox News' coverage of Obama's January 20 inauguration, anchor Chris Wallace falsely claimed that "unemployment in 1937, 1938 was higher than it was in 1933." Wallace's assertion followed statements by numerous conservative media figures, who have responded to Obama's proposals for large-scale stimulus spending by denouncing Roosevelt's New Deal policies as ineffective or damaging. In fact, unemployment fell every year from 1933 until 1938, and according to several prominent economists, the unemployment rate rose in 1938 not because New Deal stimulus spending failed but, rather, because Roosevelt did not go far enough in pursuing those policies and because his attempts to balance the budget hindered recovery. In advancing the claim, some, including Washington Post columnist George Will and syndicated columnist Mona Charen, have cherry-picked data from the Bureau of Labor Statistics (BLS) -- which, at the time, counted those employed by the New Deal's emergency work programs as unemployed -- to assert that the New Deal failed to reduce unemployment. After World War II, the BLS ceased counting those in work-relief programs as unemployed. But even without including "emergency" public employment under the New Deal, the unemployment rate in 1937 and 1938 did not surpass the 1933 unemployment rate, as Wallace claimed.
Additionally, contrary to the January 7 claim of Fox News' Brit Hume that "everybody agrees ... that the New Deal failed," Nobel laureate and New York Times columnist Paul Krugman has written that the New Deal produced "long-run achievements" that "remain the bedrock of our nation's economic stability" and that Roosevelt's short-term successes were constrained because "he was eager to return to conservative budget principles."
On the January 23 edition of Fox News' Hannity, host Sean Hannity joined the ranks of media figures who have cited Japanese fiscal policy in the 1990s in arguing against a large scale-stimulus plan to combat the current recession in the United States. Hannity claimed that "the Japanese economy was suffering, in the '90s, they had eight separate stimulus packages that created, in their history, massive debt. It was unprecedented. And it didn't work." However, as Media Matters documented, according to prominent economists, economic conditions were improving in Japan before the Japanese government temporarily abandoned fiscal stimulus policies in an attempt to reduce the deficit. And Krugman, for one, points to Japan's fiscal stimulus packages as having "probably prevented a weak economy from plunging into an actual depression."
Additionally, Adam Posen, deputy director of the Peterson Institute for International Economics, wrote in his September 1998 book, Restoring Japan's Economic Growth, that "the 1995 stimulus package ... did result in solid growth in 1996, demonstrating that fiscal policy does work when it is tried. As on earlier occasions in the 1990s, however, the positive response to fiscal stimulus was undercut by fiscal contraction in 1996 and 1997." Posen also testified before the U.S. House of Representatives that the Japanese government "way overstated the amount of fiscal stimulus in which they actually engaged." Other economists and media accounts of Japan's policies agree with Posen that the positive effects of the mid-decade stimulus packages in Japan were curtailed by attempts to scale back spending and increase taxes.
Numerous media figures, including David Brooks, Larry Kudlow, Brit Hume, and George Stephanopoulos, have asserted that the proposed economic recovery bill would amount to spending at least $217,000 for every job created, echoing a January 15 "Stimulus Quick Facts" press release issued by the Republicans on the House Appropriations Committee. The release stated that "President-elect Obama has said that his proposed stimulus legislation will create or save 3 million jobs. This means that this legislation will spend about $275,000 per job. The average household income in the U.S. is $42,000 a year." But by calculating the per-job cost by dividing the estimated total cost of the recovery bill by the estimated number of jobs created -- and thus suggesting that the sole purpose of that package is to create jobs -- these media figures ignored other tangible benefits stemming from the package, such as infrastructure improvements and investments in education, health, and public safety.
Moreover, economists, including Center for Economic and Policy Research co-director Dean Baker and Nobel laureate Paul Krugman, have presented another criticism of the claim. In a January 24 post on The American Prospect's Beat the Press blog, Baker wrote: "The Republicans have become fond of saying that President Obama's stimulus package will cost $275,000 for every job created. The media have been typically derelict in simply reporting this number without making any assessment to evaluate it -- as though readers in their spare time are supposed to determine whether it is accurate or not." Baker continued:
Okay, let's do the reporters' work for them. First, where do the Republicans get this number? They divide the the $825 billion cost of the stimulus by 3 million jobs that President Obama had originally pledged.
Their arithmetic is right but both numbers are wrong. First, the projections from the Obama team is that their package will create 4 million jobs, not 3 million. Furthermore, it is important to note that this over 2 years, not one year.
The cost is also wrong, or at least misleading. If we assume that the stimulus will work as planned, then it will boost GDP by approximately 1.5 times the amount of spending or $620 billion a year. If GDP rises by this amount, then it will translate into roughly $155 billion a year in higher taxes/lower spending than if we didn't do the stimulus. This is money that should be subtracted from the cost to the taxpayers.
So, if net out the increased revenue from the growth generated by the stimulus we end up with a 2-year cost of $515 billion which will generate roughly 8 million job-years. That comes to about $65k per job year, less than one-fourth of the Republicans' number.
Similarly, in his January 25 New York Times column, Krugman wrote, "As the debate over President Obama's economic stimulus plan gets under way, one thing is certain: many of the plan's opponents aren't arguing in good faith. ... The true cost per job of the Obama plan will probably be closer to $100,000 than $275,000 -- and the net cost will be as little as $60,000 once you take into account the fact that a stronger economy means higher tax receipts."
On January 27, the San Francisco Chronicle reported the false claim -- which the Chronicle attributed to the group Americans for Limited Government -- that $4.19 billion of the economic recovery plan "would go to the liberal housing activist group ACORN." Later the same day, nationally syndicated radio host Rush Limbaugh repeated the claim: "[I]n the Obama stimulus package, $4.19 billion is going to ACORN. Obama's community organizing -- you -- would somebody tell me what the stimulus is in that?" Limbaugh continued: "Oh, it's not called 'ACORN,' it's called 'neighborhood stabilization programs.' Now, would somebody explain to me what in the name of Sam Hill ... $4.19 billion to a voter-fraud organization has to do with stimulus?"
In fact, the bill contains no language mentioning ACORN. The false claim is based on a misrepresentation of a provision that would appropriate $4,190,000,000 "for neighborhood stabilization activities related to emergency assistance for the redevelopment of abandoned and foreclosed homes as authorized under division B, title III of the Housing and Economic Recovery Act of 2008." The provision requires that money will be distributed through competitive processes. It states that "not less than $3,440,000,000 shall be allocated by a competition" to "States, units of general local government, and nonprofit entities or consortia of nonprofit entities." It also provides that "up to $750,000,000 shall be awarded by competition to nonprofit entities or consortia of nonprofit entities to provide community stabilization assistance."
The Chronicle's report and Limbaugh's comments echo material released by House Minority Leader John Boehner's (R-OH) office. A January 26 "fast facts" release claimed of the stimulus bill: "The legislation could open billions of taxpayer dollars to left-wing groups like the Association of Community Organizations for Reform Now (ACORN), which has been accused of voter fraud, is reportedly under federal investigation; and played a key role in the housing meltdown." A January 23 release to which the January 26 document links stated that "the Democrats' bill makes groups like ACORN eligible for a $4.19 billion pot of money for 'neighborhood stabilization activities.' "
On January 22 and January 23, Michelle Malkin, Rush Limbaugh, and Sean Hannity falsely asserted or suggested that former Labor Secretary and Obama economic adviser Robert Reich, speaking at a congressional forum, proposed that jobs created by the economic recovery package should exclude white males. In fact, while addressing concerns from women's advocacy groups and others about the composition of the proposed stimulus, Reich said then and has repeatedly stated that he favors a stimulus plan that "includ[es] women and minorities, and the long-term unemployed" in addition to skilled professionals and white male construction workers, not one that is limited to women and minorities.
During the forum, Reich stated that the jobs created should not "simply go to high-skilled people who are already professionals or to white male construction workers." Reich continued: "I have nothing against white male construction workers. I'm just saying that there are a lot of other people who have needs as well. And therefore, in my remarks I have suggested to you, and I'm certainly happy to talk about it more, ways in which the money can be -- criteria can be set so that the money does go to others: the long-term unemployed, minorities, women, people who are not necessarily construction workers or high-skilled professionals."