Stimulus plan still not very stimulating
President Obama atÂ Democratic retreat: “No more Mr. Nice Guy”
As increasingly partisan battle lines were drawnÂ today over the stimulus program and President Obama Â called further delays in passing the hugeÂ package “inexcusable,” Harry Reid scrambled to line up a solid Democratic phalanx and woo a few Republicans.Â As I write this,Â it seems that Reid has struck a deal withÂ some of the GOP moderates on a $780-billion bill thatÂ would cut some of the long-termÂ spending programs supported by Democrats, while adding someÂ GOP-preferredÂ ideas.Â 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 accout the political dynamics in play.Â ButÂ 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.Â
After Obama mistakenly allowed the House Democrats to frame the contours of the package, we’ve seen aÂ debate over it emerge in which reasonable, substantive arguments about what would have the most salutary impact on the falteringÂ economy have yielded toÂ typical partisan squabbling.Â Over the past several days, the issue has been posed, falsely,Â as aÂ binary choice between action and inaction or between “the failed policies that got us here” and the mish mosh of off-the-shelf favorite DemocraticÂ Â 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 oneÂ 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:Â first, the stimulus should be timely and money should go out “almost immediately;”Â second, it should be targeted mainly to helpÂ low- and middle-income people; and third,Â it should be temporary, meaningÂ measures should not raise deficits “beyond a short horizon of a year or at most two.”
There is no question thatÂ many Republicans have been aimingÂ toÂ score political points with their conservative constituents and with a bit of luck, cut Obama down to size with aÂ perceivedÂ “defeat.”Â Â But some Republican criticisms and alternative proposalsÂ have been sound and well worth examining,Â with Summers’ guidelines in mind.
Which brings me to tax cuts vs. spending.Â Â 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.Â will produce more bang for the buck.Â There is, of course, a kernal of truth in this but it’s also misleading if you make too much of it.Â Â
Fiscal policy isÂ stimulativeÂ when the government runs atÂ aÂ deficit,Â expanding the money supply.Â Further stimulus can be hadÂ by directing this newly createdÂ moneyÂ to areas where it will generate added economic activity indirectly.Â 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.Â A deficit is a deficit, and the stimulative effect is the same.Â As to the second, spending in an area whereÂ more than a dollar ofÂ secondary activity will be produced — a multiplier effect — is obviously better.Â
So far, so good, but we need to look at Summers’ guidelines.Â AÂ big chunk of the initial stimulus billÂ in the Senate consisted of spending that mightÂ well have a higher multiplier effect but won’t be spent for a long time.Â Indeed, according to the CongressionalÂ Budget Office, $142 billion, or 22%,would not be spent until after September 30, 2010, more than 19 months from now!Â Considering the continued downward slide of the economy, even the far larger sum that would notÂ be spent more than 12 months from todayÂ is not particularly “timely.”Â
In contrast, if aÂ final billÂ slashed theÂ payroll tax in half, every worker in the country would see more money in his/her paycheck before the end of February.Â Likewise, an across-the-board tax credit, retroactive for 2007, would enableÂ most people toÂ get that extra moneyÂ before AprilÂ 15th.Â These and other tax cuts, credits and incentives could put thoseÂ newly created federal dollars into play “almost immediately,” and also target it mainly to low- and middle-income people who will spend it.Â What’s more, such tax cuts couldÂ 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 helpÂ meet their current year budget gaps, not next year’s),Â 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.Â 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.
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