Sneaky: Washington is Passing a New Stimulus Package

Given all the chatter about looming fiscal disaster in the western world of late, you might be surprised to know that Congress is close to passing a new stimulus package. But it is -- even if no one is branding it as such.

In last year's stimulus package, Congress took several steps to keep money flowing into state coffers, or to fund federal programs that would prevent consumers from pulling back spending in other areas because they had to focus on bare essentials. Now, it's planning to extend funding for Medicare, Medicaid, unemployment benefits and the COBRA health insurance plan.

These steps are wildly popular with hard-hit states, including supposedly tax-averse Republican governors. State politicians are on the front lines of the battle against unemployment, and they are required by law to balance their budgets. I recently witnessed a staffer for Florida Gov. Charlie Crist back these items -- while Crist was still a Republican under fire for not being conservative enough.

The reasons are not hard to fathom: stimulus works. The stimulus package created at least 1.8 million full-time equivalent jobs, according to the nonpartisan Congressional Budget Office. (The Washington Post's Perry Bacon Jr. recently gave the ideologues at the Heritage Foundation a shot at unemployment benefits, saying they reduce the incentive to take jobs. In fact, this thesis was thoroughly debunked by a San Francisco Fed study last month.)

In theory, Congress is operating under the "pay-go" rule, a stricture that forces lawmakers to come up with offsetting budget cuts or tax hikes to pay for any new spending. And to the extent that this rule holds, there's no net stimulus -- money is simply shifted around. In fact, buried in a CBO report, is the fact that some spending provisions, notably emergency outlays, are exempted from the pay-go rules. So, the draft legislation would increase the budget deficit by about $123 billion in 2010 and 2011, and by much smaller annual amounts in the following decade.

Another point worth considering. Other spending in the legislation is financed by imposing higher taxes on gains private equity mavens earn when they take a cut of their investors' profits ("carried interest," if you care). To the extent that wealthy private equity moguls bank their money and hard-hit consumers spend it, this represents a shift of money (not a lot, in the grander scheme of things) into immediate consumption.

Surprise, surprise: we have stimulus!

The Obama administration, worried about being tagged as soft-on-deficits, doesn't really want to admit what is going on here. Larry Summers, the top White House economic adviser, backed the new spending legislation in a speech this week. But he dwelled at length on the importance of reducing the deficit in the longer term. The word "stimulus" appears exactly once, though to be fair he did articulate the economic rationale for the bill:

Consider the package currently under consideration in Congress to extend unemployment and health benefits to those out of work and support to states to avoid budget cuts as a case in point. It would be an act of fiscal shortsightedness to break from the longstanding practice of extending these provisions at a moment when sustained economic recovery is so crucial to our medium-term fiscal prospects.

Related:

• Forget the Unemployment Rate -- It's the Long-Term Jobless Who Should Worry Us
• Give It a Rest, Already -- the U.S. is Not Like Greece