Stimulus III: Democrats Want TARP To Become A Revolving Line Of Political Credit.

Stimulus III
Democrats want TARP to become a revolving line of political credit.

If at first fiscal stimulus doesn't succeed, spend, spend again. That's the motto President Obama embraced yesterday, even if he didn't use the word "stimulus," which has managed to set a political record in the speed with which it has become unpopular with voters. This time, the spending is being called "Proposals to Accelerate Job Growth and Lay the Foundation for Robust Economic Growth."

But wasn't that also supposed to be the point of last February's $787 billion stimulus, or for that matter of the Nancy Pelosi-George W. Bush $165 billion stimulus of February 2008?

Nearly two years after that first Keynesian stimulus that was supposed to prevent a recession, and nearly a year after the second that the White House said would keep the jobless rate below 8%, the President now feels obliged to propose a third. Like the joke about Paul Krugman having predicted seven of the last two recessions, sooner or later the White House is bound to get the political timing right.

This time around, the President is at least suggesting a couple of good ideas. One proposal would revive his 2008 campaign promise for a zero capital gains tax on new investments in small business stock. Mr. Obama dropped the idea from his first stimulus because liberals on Capitol Hill hate the words "capital gains," but yesterday he proposed a zero rate for one year.

Eight of the 18 California Conservation Corps workers were hired by the U.S. Forest Service as part of the federal stimulus plan.

Another decent idea would extend enhanced expensing for small business that was otherwise set to expire at the end of this year. This will allow businesses to immediately expense up to $250,000 of certain investments, which should help with business cash flow.

Both ideas would reduce the cost of capital, and thus would partially counteract the many tax increases coming from the House and Senate that would raise the cost of capital and hiring. These tax reductions also recognize that the only source of real long-term job creation is private business.

Most of the rest of Mr. Obama's proposals are unfortunately a grab-bag of greatest Congressional mis-hits. They include a "new" tax credit for small business hiring that looks suspiciously like Jimmy Carter's jobs tax credit that led to few net new jobs and was abandoned after a year.

There's also a flood of new spending, with the amount presumably to come later from Congress (oh oh!), on highways and other public works. Perhaps you thought these "shovel-ready" projects had been included as part of Stimulus II. Alas, that was merely the sales pitch. In the event, the bulk of that money was shovel-readied to such transfer payments as Medicaid, welfare, community block grants, and cash for the clunkers who run failing public schools. This time, we're told, roads and bridges really will get the money—and you can bet they'll all be built with higher Davis-Bacon wage rates that will balloon their cost, too.

How will this all be paid for? Well, there are the huge tax increases to come in 2011, if not earlier, as well as more federal borrowing. This time, however, Mr. Obama is also proposing to use funds repaid by banks to the $700 billion Troubled Asset Relief Program. When Congress passed TARP a year ago, the Democrats who ran the joint vowed that the cash was intended to save the financial system and that any returns would promptly go to pay down the debt. As Candidate Obama put it, "every penny" would go "directly back to the American people." That was then.

Now, we're heading into a new election year and Treasury says it expects the bailout to cost $200 billion less than expected, and that it should be able to recover all but $42 billion of the $370 billion it has lent to financial firms. That ought to be cause for rejoicing—and for using the cash to reduce a federal deficit that reached $1.4 trillion in fiscal 2009 and after two months is on pace to be even higher in 2010.

Instead, TARP is now morphing into a revolving line of Democratic political credit. Barney Frank wants to divert at least $4 billion to bail out more home owners. Virginia Senator Mark Warner wants $50 billion for loans to small business. Mr. Obama proposed yesterday to use TARP to finance his own ideas as part of Stimulus III, and if he and fellow Democrats succeed the taxpayers will never see this cash again.

The President tried to recast his "every penny" promise yesterday by arguing that recycled TARP cash would create jobs and thus revenue to bring down the deficit. This is also Speaker Nancy Pelosi's new talking point. They're right that a strong economy is the best way to reduce deficits, but their spend and spend again policies only make closing those deficits more difficult.

One note of hope here is that the White House admits that the TARP statute restricts its use to the "stabilization" of the financial system. The law also specifies that repaid money must go to deficit reduction, a fact that allowed Mrs. Pelosi to gather enough votes to pass TARP last year. This means Democrats are going to have to rewrite the law to spend TARP on pork and green jobs, giving Senate Republicans some leverage and Blue Dog Democrats another chance to write the ad scripts for their 2010 opponents.

As the President gladly admitted yesterday, the economy is recovering and even the job market is healing. If Congress won't reduce taxes, the best stimulus now would be for Congress to stop scaring private job creators by promising to help them. Just do nothing at all.