February 06, 2008

Debating the Stimulus Package

It's funny how agreeable and bipartisan everyone becomes once it's decided that we need some new tax cuts that are not paid for.

The stimulus package being debated by Congress right now may do some real good for the economy. The theory is that there is excess capacity in the economy and not enough demand, and putting money in the hands of people who will spend it will boost demand and get the engine running again. The part that Democrats and Republicans agree on, naturally, is tax cuts.

They won't be paid for, which makes sense in the short-run since taking money away from the economy would theoretically undo the stimulative effect of giving people more money to spend. It would have been nice to have some revenue-raising provisions that kick in a couple years down the road, when any recession will be over, to ensure long-term budget neutrality, but the world Congress inhabits is far, far, far from a perfect world.

What's amusing about this process is that the President and his allies in Congress make a philosophical distinction between tax cuts and increased spending that has no basis in reality. Both tax cuts and increased spending mean less revenue for other priorities (or in our current situation, a higher budget deficit). And it's not as though the Republicans are against spending because it's targeted to very specific groups; they support countless tax cuts that are targeted towards specific groups and businesses.

Rather, they opppose spending increases because it represents larger government, while giving money back to people moves us closer to their ideal of smaller government in their minds. Of course, this is ludicrous because the government does not actually shrink to a degree that corresponds with any of these tax cuts (the bill is just sent to the next generation), but that seems to be besides the point.

Once we've decided that we're going to increase the deficit to stimulate the economy, we might as well do it in a way that really will be effective in warding off a recession. And as several economists have pointed out, the way to do that is to through benefit programs like unemployment insurance and food stamps because they put money in the hands of people who will spend it immediately rather than saving it, because they have so many needs that are unmet right now. Middle-income and especially high-income people are likely to save any money given to them, which does not have the immediate positive impact on the economy needed to prevent or counteract a recession.

But that would be spending, and spending, in the conservative mind, is always bad. It's better to use tax cuts. Even if the tax cuts cost more revenue and stimulate the economy less, they're still preferable to increased spending.

The plan negotiated between House leaders and the Bush administration includes a small tax rebate for people who work and pay federal payroll taxes but don't earn enough to pay federal income taxes. The White House apparently acted as though this was a concession and extracted, in return, tax cuts for business investment that will probably do little to help the economy because investment usually takes a while to arrange and will typically not really happen until after the recession has passed.

Now Republican leaders in the Senate and the White House have agreed to Senate Democrats' plans to extend those rebates to seniors and people with disabilities who receive Social Security and veterans with disabilities. But they have not yet agreed to extending unemployment benefits, even though that's one of the measures most likely to actually stimulate the economy.


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