Friday, February 6, 2009

Stimulus plan still not very stimulating

President Obama at Democratic retreat: "No more Mr. Nice Guy"

As increasingly partisan battle lines were drawn today over the stimulus program and President Obama called further delays in passing the huge package “inexcusable,” Harry Reid scrambled to line up a solid Democratic phalanx and woo a few Republicans. As I write this, it seems that Reid has struck a deal with some of the GOP moderates on a $780-billion bill that would cut some of the long-term spending programs supported by Democrats, while adding some GOP-preferred ideas. We’ll see whether it passes tonight or tomorrow.

I’m sure it will be the best that can be got in the present atmosphere, taking unto account the political dynamics in play. But having watched this process almost hour by hour for weeks, I’m still far from convinced that whatever passes the Senate and makes it through conference to the President’s desk will be all that stimulating.

After Obama mistakenly allowed the House Democrats to frame the contours of the package, we’ve seen a debate over it emerge in which reasonable, substantive arguments about what would have the most salutary impact on the faltering economy have yielded to typical partisan squabbling. Over the past several days, the issue has been posed, falsely, as a binary choice between action and inaction or between “the failed policies that got us here” and the mish mosh of off-the-shelf favorite Democratic nostrums that House Democratic staffers stuffed into the original bill.

I have consistently supported a massive fiscal stimulus program (as I did here) — but a smart one that would maximize the boost to the economy that we badly need now. I’ve taken seriously these guidelines for effective fiscal policy suggested last year by Larry Summers: first, the stimulus should be timely and money should go out “almost immediately;” second, it should be targeted mainly to help low- and middle-income people; and third, it should be temporary, meaning measures should not raise deficits “beyond a short horizon of a year or at most two.”

There is no question that many Republicans have been aiming to score political points with their conservative constituents and with a bit of luck, cut Obama down to size with a perceived ”defeat.” But some Republican criticisms and alternative proposals have been sound and well worth examining, with Summers’ guidelines in mind.

Which brings me to tax cuts vs. spending. The argument has been made ad nauseam that tax cuts just don’t stimulate because people will save the money, and that federal spending for infrastructure, education, etc. will produce more bang for the buck. There is, of course, a kernal of truth in this but it’s also misleading if you make too much of it.

Fiscal policy is stimulative when the government runs at a deficit, expanding the money supply. Further stimulus can be had by directing this newly created money to areas where it will generate added economic activity indirectly. As to the the first, it matters not at all whether the government runs a dollar’s more deficit by cutting taxes or by giving away printed money. A deficit is a deficit, and the stimulative effect is the same. As to the second, spending in an area where more than a dollar of secondary activity will be produced — a multiplier effect — is obviously better.

So far, so good, but we need to look at Summers’ guidelines. A big chunk of the initial stimulus bill in the Senate consisted of spending that might well have a higher multiplier effect but won’t be spent for a long time. Indeed, according to the Congressional Budget Office, $142 billion, or 22%,would not be spent until after September 30, 2010, more than 19 months from now! Considering the continued downward slide of the economy, even the far larger sum that would not be spent more than 12 months from today is not particularly “timely.”

In contrast, if a final bill slashed the payroll tax in half, every worker in the country would see more money in his/her paycheck before the end of February. Likewise, an across-the-board tax credit, retroactive for 2007, would enable most people to get that extra money before April 15th. These and other tax cuts, credits and incentives could put those newly created federal dollars into play “almost immediately,” and also target it mainly to low- and middle-income people who will spend it. What’s more, such tax cuts could be legislated for a year (or less) at a time, renewed or extended as necessary, and retired when the economy revives so as not to raise deficits “beyond a short horizon of a year or at most two.”

The question is — or should be — this: is a $1.00 of stimulus this year, even this month, really worth less than $1.25 or $1.50 delivered in two or three years when the recession may be over and inflation the tougher challenge?

The ideal stimulus plan, in my view, would include all the proposed relief — i.e., extended unemployment and health care coverage, food stamps, etc. — the truly “shovel ready” infrastructure projects, plus a trimmed down version of some of the more job-producing public investments, about half of what the House proprosed for states and cities (to help meet their current year budget gaps, not next year’s), and a whopping set of temporary but renewable income and payroll taxes targeted to the broad middle class, along with some smartly targeted tax incentives for business and homeowners.

It looks as if the Senate will vote soon on the compromise $780-billion plan, the product of work by Senators Nelson, Collins, Specter and other moderates. Everyone can be grateful that there are some people in the Senate who think for themselves and have not given up on reaching across the aisle.

What's your opinion of the plan before the Senate? Post a comment.

1 comment:

  1. Your plan sounds a lot like the plan John McCain put before his colleagues. I especially like the payroll tax cut as it is immediate - as you wrote, we would see that influx of cash by the end of the month.

    My husband heard an economist on the radio offer a plan for all homeowners to refinance at a 4% interest rate, which seems to be a pretty good idea too. I'm not certain of details, if homeowners would pick up the refinancing costs, which would prohibit probably half from doing so. It would have to be clear to homeowners how many points would make refinancing attractive.

    The issue really is that the president and congress are rushing a solution through instead of giving time to all of these suggestions. That leads a lot of people to wonder - are we about to go off the ledge, which induces its own panic, or are Democrats trying to ram something down our throats that normally the moderates and conservatives would never support. Neither is very appealing to the "purple" parts of the population.

    No one wanted to be more wrong about Obama than me - I have two children and a business with several employees (not as many as before the downturn). I wanted to think that he was post-partisan after he was elected, though I didn't vote for him. As a fiscal conservative, I simply could not, though I thought the McCain destroyed his candidacy with his ham-fisted effort to deal with the first panicked bailout.

    Leaving this bailout to Nancy Pelosi demonstrated complete incompetence in my view. I don't know what Obama was thinking unless it was declaring war on Republicans. I really didn't think that the GOP would have a breath of life left after November, feeling like they had not learned their lessons about fiscal conservatism, so it's a bit of a shocker that Obama handed this issue to them on a silver platter. They don't deserve the life raft, but I sure hope they use it.

    We owe our kids a better future than one mired in debt, with business opportunities hobbled by bureaucracy and Big Government.