"Don't expect miracles" ran one headline, referring to the Obama administration's comments about their massive stimulus experiment. Apparently the Obama team wants to lower Americans' expectations of the bill that Obama has pledged to sign tomorrow.

The truth is, I demand a miracle from this bill. I'm talking about a Praise Jesus! miracle. Because the amount of money that this bill is going to cost tax payers, $787 billion, is a high price to pay for mediocre results.

According to estimates from the Wall Street Journal, the annual deficit in 2009 will be nearly 14% of the US gross domestic product with the stimulus package.

The Obama administration hopes that the stimulus will create 3.5 million jobs. However, the chief economist at Moody's Economy.com, Mark Zandi, believes that the administration's hopes are too optimistic. He estimates that the stimulus will only add 2 to 2.5 million jobs, lowering unemployment by 1 to 1.5%.

You're right Barack, that's certainly no miracle. And I'm not sure that even 3.5 million jobs are worth the massive increase in federal deficits.

In the long run, sustained budget deficits will likely dampen overall economic growth. Budget deficits dampen long term economic growth because they raise interest rates.

Increased government spending decreases national saving which increases interest rates. In turn, investment in the economy decreases because of higher interest rates. Essentially, it costs more to invest so fewer companies do it.

Lower investment consequently leads to lower productivity growth and lower economic growth in the future.

US deficits are already on track to expand substantially without massive stimulus spending.

Government spending will vastly increase in the coming years because the US population is aging. As the Baby Boomers continue to retire and accept medicare and social security benefits, government costs in these areas will soar.

Together, the stimulus spending and rising costs for medicare and social security will heavily depress future economic growth.

Absent divine intervention, the stimulus will not stimulate any miracles. It will most likely produce mediocre, short-term results and worsen the dismal long-term potential for the US economy.

The miracle I should be demanding is that the President won't sign the bill tomorrow. But that's not going to happen. So I guess I will just take the President's advice: I won't expect any miracles--now or in the future.

Article by Ryan Olivett

Links:

Congressional Budget Office

Alternative Stimulus Package

The Becker-Posner Blog

NYT: Greg Mankiw

Deficit Spending