The Congressional Budget Office says the economic stimulus will, in the short run, help the economy. But, it says, the huge American debt that will be fueled by the stimulus will “crowd out” future investment in America. This debt and restraint on investment will lower gross domestic product (GDP) for about 10 years.
The CBO also favors the Senate version of the simulus now under discussion.
“CBO’s basic assumption is that, in the long run, each dollar of additional debt crowds out about a third of a dollar’s worth of private domestic capital,” the CBO said.
The budget office said the bills would help GDP and save or create jobs in the short term, but estimated that under the Senate bill, GDP would be 0.1 percent to 0.3 percent lower by 2019 than if no action is taken.
The CBO analysis was requested by Senator Chuck Grassley a Republican from Iowa.
Grassley was unable to deliver the facts on the Senate floor on Wednesday due to what one staffer called the “carnival atmosphere and overdrive speed” of the Senate during the stimulus debate.
Grassley said “we need to look before we leap” on the stimulus.
He said, as is often done according to Senate rules, “I’d like the rest of my remarks read into the record.” Then he added as he left in disgust, “This is a missing piece of the puzzle and [barely audible] nobody cares.”
In a letter to Senator Chuck Grassley, the CBO said:
In contrast to its positive near-term macroeconomic effects, the Senate legislation would reduce output slightly in the long run, CBO estimates, as would other similar proposals. The principal channel for this effect is that the legislation would result in an increase in government debt. To the extent that people hold their wealth in the form of government bonds rather than in a form that can be used to finance private investment, the increased government debt would tend to “crowd out” private investment—thus reducing the stock of private capital and the long-term potential output of the economy.
The negative effect of crowding out could be offset somewhat by a positive long-term effect on the economy of some provsions—such as funding for infrastructure spending, education programs, and investment incentives, which might increase economic output in the long run. CBO estimated that such provisions account for roughly one-quarter of the legislation’s budgetary cost. Including the effects of both crowding out of private investment (which would reduce output in the long run) and possibly productive government investment (which could increase output), CBO estimates that by 2019 the Senate legislation would reduce GDP by 0.1 percent to 0.3 percent on net.