Limbaugh op-ed misrepresents reason for stimulus

In a January 29 Wall Street Journal op-ed criticizing President Obama's economic recovery plan and offering his own suggestions for such a plan, Rush Limbaugh echoed a Republican talking point in asserting 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." But Limbaugh's claim misses the point and misrepresents the reason for the stimulus bill. Even with projections that the economy will turn around, economists including Congressional Budget Office (CBO) director Douglas W. Elmendorf take the position that an economic stimulus package is necessary, both during the recession and after the economy begins to recover.

Limbaugh's suggestion that a stimulus bill isn't necessary because the economy will recover without it echoes a claim by congressional Republicans, who, as a January 28 Wall Street Journal article reported, "contend 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."

In fact, in written congressional 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 long after the technical 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."

Additionally, when committee chairman John Spratt (D-SC) asked Elmendorf to comment on the length of time over which stimulus spending would occur during the January 27 Budget Committee hearing, Elmendorf said that because the "GDP gap"-- the difference between the CBO's estimates of "potential" and actual economic output -- "will persist for a number of years, fiscal stimulus, to try and narrow that gap, would be appropriate, in the minds of a wide majority of economists, for a number of years, not just in 2009 and 2010."

Further, Mark Zandi, chief economist at Moodys.com, has also predicted that even if real GDP returned to its 2008 level by 2012, unemployment would still remain over 9 percent if fiscal stimulus is not implemented. If a stimulus plan of at least $750 billion is passed, Zandi predicts that GDP will reach its 2008 level in 2010 and that unemployment will fall back to "close to 5% by late 2012." From Zandi's January 6 report:

The $750 billion stimulus plan would not forestall a sizable decline in real GDP in 2009, but it would ensure that real GDP returns to its previous peak by the second half of 2010 (see Table 3). The fiscal stimulus limits the peak-to-trough decline in jobs to some 5 million, and the unemployment rate peaks at nearly 9% in early 2010. With the stimulus, the unemployment rate falls back to its full employment rate of close to 5% by late 2012. Without the stimulus, the unemployment rate rises to well over 11% by mid-2010 and ends 2012 at over 8%, still extraordinarily high.

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In his op-ed, Limbaugh also advocated cutting the corporate tax rate, which economists have said will have a relatively weak stimulative effect. Zandi predicts that for every dollar federal revenue is reduced by corporate tax cuts, there will be a corresponding increase in GDP of only 30 cents. By contrast, Zandi predicts that for every dollar spent on extending unemployment benefits, there will be a corresponding increase of $1.64 in GDP. Zandi included the following chart in July 2008 written testimony before the House Small Business Committee:

The Center for Budget and Policy Priorities (CBPP) has also reported that corporate tax cuts are "likely ineffective as stimulus." Citing research by the Congressional Research Service (CRS), CBPP stated:

The primary problem employers face in a recession is a shortage of demand for their products, not a shortage of cash. When firms face a shortage of demand, they will find it more attractive to retain -- or pass to shareholders -- any new cash they receive from a tax cut, rather than invest in increased production of goods and services for which no customers exist.

But passing the tax benefits to shareholders and business owners would not stimulate the economy much. Shareholders and business owners are two groups that tend to have higher incomes -- and thus to save, rather than spend, much of any additional income they receive. As CRS concluded, such a tax cut "is more likely to be spent on reducing debt, or paying out dividends. Both choices would not expand aggregate demand."

From Limbaugh's Wall Street Journal op-ed:

There's a serious debate in this country as to how best to end the recession. The 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.

I believe the wrong kind is precisely what President Barack Obama has proposed.

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I say, cut the U.S. corporate tax rate -- at 35%, among the highest of all industrialized nations -- in half. Suspend the capital gains tax for a year to incentivize new investment, after which it would be reimposed at 10%. Then get out of the way! Once Wall Street starts ticking up 500 points a day, the rest of the private sector will follow. There's no reason to tell the American people their future is bleak. There's no reason, as the administration is doing, to depress their hopes. There's no reason to insist that recovery can't happen quickly, because it can.