The Economy

Floor Speech

Mr. GRASSLEY. Madam President, one of the arguments we have heard in support of the proposed $1 trillion stimulus bill is that our economy is performing below its potential. It is argued we have a gap between what we could produce and what we are producing.

There is no question our economy is producing less than it could. It is quite obvious we are in a recession. But that does not mean a massive, temporary increase in Government spending can fill the gap and thus restore our economy to its full potential. In fact, the opposite is true.

The proposed $1 trillion increase in Government spending will impede recovery and reduce future growth. The Congressional Budget Office--which I want to remind people listening, as well as my colleagues who tend to forget it--is a nonpartisan group of people who are professionals in making judgments about Government programs and what they cost. The Congressional Budget Office reported last week that the stimulus bill will create temporary jobs that cost as much as $300,000 apiece, and then it will reduce jobs permanently compared to no stimulus bill at all.

Economists often talk about the economy in terms of a circular flow. The circle assumes a continuous flow between production and consumption. Businesses hire workers who produce goods and earn a salary in order to buy the goods they produce. According to this world view, whenever production declines, the solution is to increase demand and thereby boost production.

In reality, the economy is not a circle. Production involves a series of steps in which raw materials are transformed into intermediate goods which are transformed into finished products. This process takes time as value is added at every step. That is what production is all about: adding steps to the process until you get to a finished product.

For example, to make bread, we need to grow wheat. To grow wheat, we need to work the land. To work the land, we need tractors. To build tractors, we need plastic, steel, rubber--and you know all the other components. Nearly every step of this process relies on trained individuals with unique skills and unique knowledge, people who utilize tools and material designed to meet their very specialized needs.

Given the complex structure of production, an increase in the demand for bread cannot instantaneously bring about an increase in the supply of all the things needed to produce more bread. Likewise, a reduction in the demand for bread cannot instantaneously convert all of the people's places and things previously used to produce bread into some other productive alternative.

At a given point in time, our economy is comprised of a specific set of goods and services, each with its unique factors of supply and demand. When market conditions change--either because of fickle consumers or maybe foreign competition or maybe rising oil prices or maybe a stock market bubble or a housing bubble, which we all know about now--some of the goods and services that existed before the change are no longer suitable to meet the market conditions that exist after that change. Those are some conditions we are in right now.

The unemployed workers and idle resources that exist today are largely the result of the decline in home prices and the associated turmoil in the financial markets. Most everyone in this body knows that. I think most people at the grassroots know there were problems with housing that brought about our credit crunch and the unemployment and recession we have now

because our housing market was overleveraged, overpriced, and unsustainable, bringing about a great deal of unemployment caused by changes in the economy and adjustments to that economy going on and not going on in a very likeable way.

The bursting of the housing bubble has not only affected homebuilders, realtors, and mortgage brokers, it has also spilled over into other areas of our economy. For example, falling housing prices have reduced the ability of many homeowners to finance nonhousing-related spending through the use of home equity loans.

As workers become unemployed and resources idle, it is said that our economy has fallen below its potential, and we all know that. However, that does not mean a massive temporary increase in Government spending can fill that gap that we all realize exists and, hence, cannot necessarily restore our economy to its full potential because massive temporary increases in Government spending does not have that effect. Spending for the sake of spending, then, is not a solution.

Every dollar the Government spends does, in fact, have a cost, regardless of whether the dollar comes from taxes, from borrowing or through the printing press. When the Government spends money, what does it do? It diverts workers and resources from alternative uses. We may not think about that, but that is the impact of the Government on the free market economy we have. During a recession, when workers are unemployed and resources are idle, it is argued that this diversion is a good thing. However, the stimulus bill is not restricted just to unemployed workers and just to idle resources. Moreover, the stimulus bill is supposedly temporary.

Consider the implications of unrestricted, temporary Government spending. I wish to have my colleagues consider those. In one case, unemployed workers obtained temporary make-work jobs and, therefore, delay their search for meaningful, long-term employment. In the other case, employed workers are diverted from their current employment into temporary make-work jobs and thereby reduce the output of other goods and services. Thus, if you think about temporary make-work jobs, they add little or no value to the economy, while diverting employment from other jobs, probably other jobs that are very long term and productive. As a result, the money paid to these workers increases the demand for goods and services while reducing the supply. We know what results then: more inflation and less growth.

The only way the Government can increase economic growth is by spending other people's money more efficiently than those individuals would. But instead of arguing the Government can spend money better than everyone else, the supporters of the stimulus bill are relying on the argument that Government can spend money faster than everyone else can. As President Obama said last week in Williamsburg, VA:

So then you get the argument, ``Well, this is not a stimulus bill, this is a spending bill.'' What do you think stimulus is? That is the whole point.

However, that is not the whole point. What matters is whether we are producing goods and services that people want to buy or whether the Government is paying people to engage in activities that have less value than the private sector alternatives.

Let me be clear. Not all Government spending is wasteful and unnecessary. Government spending designed to meet a critical need can be beneficial, and we can list a lot of things the Government does that are beneficial but not necessarily the things that are in this stimulus bill or at least not all of them. We could go to building the interstate highway system, for example. It increased our ability to travel and transport goods across the Nation. However, the economic benefit is derived from the transportation services that result from the interstate highway system and not from the jobs that created the interstate highway system.

If the goal of infrastructure spending is jobs, then why not give everyone a shovel or a spoon or even build roads by our hands. We could create millions of jobs. Now, no one has proposed that--at least not yet--but the point ought to be very clear. When Government spends money in order to create as many jobs as possible, as fast as possible, we end up with Government boondoggles instead of sound economic policy.

As an aside, I would point out that repairing our existing infrastructure is a necessary expense; however, such activity causes increased traffic congestion and delays. The loss in productivity and output due to increased travel time and fuel consumption is an unavoidable cost of maintaining an existing benefit, which the interstate highway is or which all our highways and streets and roads are. There may be a cost-benefit analysis that shows we would benefit from spending more to build and maintain our infrastructure; however, this analysis would also show that cost is ongoing over a long period of time.

I ask unanimous consent for 1 more minute.

The PRESIDING OFFICER. Without objection, it is so ordered.

Mr. GRASSLEY. We should not waste valuable resources on needless, temporary projects, nor should we fool ourselves into believing that truly useful projects can be funded on a temporary basis. Any worthwhile investment will involve an ongoing expense.

Those who claim all the spending in the stimulus bill will be temporary are essentially admitting it will have no lasting value. Alternatively, those who claim it will have a long-term benefit are essentially admitting the spending
will not be temporary. Clearly, both these claims cannot be true. Contrary to what some people might have us believe, a massive increase in Government spending for the purposes of creating temporary make-work jobs is not a sound economic recovery plan.

I yield the floor.

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