When a bitterly divided Congress failed
to pass an Economic stimulus bill last fall, many predicted the recession
would only worsen. But while few were paying attention, government spending
surpassed the amounts envisioned in the stimulus measure, exceeding what
even the most vociferous advocates wanted. The unexpected surge - along
with the remarkable strength in consumer spending - helps to explain why
the recession, to nearly everyone's surprise, has been so mild and may
beending.
The mood was much different last fall. Anticipating harder times, Democrats
and Republicans pushed for an additional $80 billion to $100 billion in
federal outlays. While they agreed on this goal, they deadlocked over
how to allocate the money. Democrats wanted the government to spend nearly
all of the money, while the Republicans emphasized new tax breaks for
business and consumers, not outright spending. Despite the bill's failure
– a severely watered-down version finally passed this month –
government outlays rose sharply in response to dozens of uncoordinated
decisions and fortuitous windfalls. The surge, which started in October,
has continued into this month at a rate of more than $100 billion, new
government data suggest. And income tax cuts that went into effect at
the beginning of this year are expected to provide a further lift to the
economy.
"You can reasonably argue that the recession, which seems to have
ended, came to an end because of aggressive government spending,"
said Mark M. Zandi, chief economist at Economy.com, a forecasting and
data gathering firm. Some of the stepped-up outlays, of course, went to
the military and to pay for domestic actions to fight terrorism in response
to the Sept. 11 attacks. Significantly more, however, was delivered in
the form of increased spending on highways, school construction, Medicaid,
unemployment insurance and numerous Municipal projects.
After shrinking last summer, the American economy reversed course and
grew from October through December at an annual rate of 1.4 percent. The
results of aggressive Government spending – not only at the federal
level, but among states and cities as well – accounts for much of
the swing from contraction to expansion, even without adding in the tax
breaks, the Bureau of Economic Analysis reports. The rise in government
outlays, along with the remarkable bounce back in consumer spending after
Sept. 11, more than offset declines in other sectors, particularly business
spending on new equipment, offices and factories.
Will that last? The hope is that the momentum from consumers and government,
two powerful engines of demand, will restart business investment and the
recovery will be on its way. The danger, however, is that both may falter
before the economy picks up sufficient speed. Mortgage refinancing, rising
wages, bargain prices, falling energy costs, tax cuts and rebates, rock-bottom
Interest rates - all these have sustained consumers through The recession,
despite rising indebtedness. And while this year's income tax cuts promise
to provide more stimulus, most of the other supports show signs of fading.
Something similar may be happening to government spending – not
at the federal level, where the outlays in response to terrorism seem
open-ended, but in the states and cities.
Most experts thought that spending at the state and local level would
decline as tax revenue fell during the recession. Reflecting this view,
the advocates of a stimulus package pushed last fall to include subsidies
that would permit states and cities to keep up their spending. To nearly
everyone's surprise the states and cities found ways to sustain their
spending anyway, despite balanced-budget laws that require them to keep
spending in line with revenue. This rear-guard resistance, however, seems
likely to give way by early summer when many new budgets, mandating cuts,
go into effect for the fiscal year 2003.
"You can expect the drop in state and local spending that did not
occur last fall to begin to occur now," said Kevin Carey, an analyst
at the Center on Budget and Policy Priorities. So far, good luck and ingenuity
have helped the states and cities dodge that bullet. There was, for example,
a windfall in 1998 and 1999 from a federal excise tax on gasoline and
autos. That tax, earmarked for the states, produced an unanticipated $10
billion during those boom years that is now being spent to build and repair
highways. "It takes time to arrange to pour concrete," said
William Hoagland, a senior staff member of the Senate Budget Committee.
There were other tactics for sustaining spending, despite falling tax
revenue. Reserve funds, built up to record levels during the boom, have
been drawn down. Some spending cuts have been announced and then postponed.
And some states and cities have simply crossed their fingers.
Consider Vermont. Faced with rising Medicaid costs and payments to needy
families, cities in Vermont have drawn $750,000 from a $2 million account
set aside to clean up oil spills. "The gamble is that there won't
be a spill into our rivers," said Steven Jeffrey, executive director
of the Vermont League of Cities and Towns, "or a leak from some aging
storage tank, and we won't have to repay the money." The fortuitous
surge in federal spending showed up in a report this month from the nonpartisan
Congressional Budget Office. The report compared federal outlays in the
first five months of the current fiscal year – October through February
- with spending in the same months in the previous year. Outlays were
up 13.1 percent, double the usual percentage increase. Over 12 months,
the additional surge, if it continues, will total $106 billion, or the
equivalent of about one full percentage point in economic growth, even
before counting spillover effects.
"If you want to argue that we have had stimulus, without stimulus
legislation last fall, I think that is certainly the case," said
Barry B. Anderson, deputy director of the Congressional Budget Office.
The jump in federal spending has been most noticeable in rising outlays
for the military, for internal security -particularly at airports - and
in subsidies to airlines to keep them flying. New York has also received
help paying for the cleanup at ground zero. But an even greater amount
has shown up as spikes in federal pending for Medicaid, for unemployment
insurance, and, among other things, in outlays for education and highways.
Some of this money was channeled to the states, which accounted for slightly
more than half of the fourth-quarter surge in overall government spending.
The states and cities got their fattened subsidies after all, without
having them mandated in an economic stimulus package, as the advocates
had demanded last fall.
The subject did not even come up in the brief debate this month over the
very watered-down economic stimulus bill that Congress passed and President
Bush signed. It will cut some business taxes and add only $8 billion to
government spending, all of it for extended unemployment benefits. Economists
and budget analysts are just beginning to offer explanations for the unanticipated
part of the surge in government spending since October. The Medicaid increase,
for example, is attributed mostly to rising costs for prescription drugs
and to growing participation in a health insurance program for poor children.
And stepped-up spending for education has helped. "There are a multiplicity
of reasons," said Richard Kogan, a senior fellow at the Center on
Budget Priorities, "for this extraordinary increase in government
spending."