Jack doesn't like the economic stimulus package:
Note his use of the phrase that starts with "principle element" here. More on that a little later.
When Democrats and Republicans agree quickly on something, it's usually either a meaningless gesture or a raid on the federal treasury. The economic stimulus package agreed to by President Bush and congressional leaders will be more beneficial to politicians than it will be to our economy.
The deal -- the principal element of which is to give income tax rebates to people who pay little or no federal income tax -- is driven by fear our economy may be going into recession. Since the definition of a recession is two consecutive quarters of negative growth, we're not in one yet, and neither the Congressional Budget Office nor the Federal Reserve thinks we'll go into one this year. But the economy is weakening, for two principal reasons.
Actually the folks that are the official definers of "recession" don't exactly share the same definition with our J-Kel. From the National Bureau of Economic Research:
But that's a minor point.
Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dating procedure?
A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.
Here's another view of the package from someone else who doesn't like it, Paul Krugman:
House Democrats and the White House have reached an agreement on an economic stimulus plan. Unfortunately, the plan - which essentially consists of nothing but tax cuts and gives most of those tax cuts to people in fairly good financial shape - looks like a lemon.And then:
And here's what the CBO has said as recently as this past Thursday (1/24/08):
Aside from business tax breaks - which are an unhappy story for another column - the plan gives each worker making less than $75,000 a $300 check, plus additional amounts to people who make enough to pay substantial sums in income tax. This ensures that the bulk of the money would go to people who are doing O.K. financially - which misses the whole point.
The goal of a stimulus plan should be to support overall spending, so as to avert or limit the depth of a recession. If the money the government lays out doesn't get spent - if it just gets added to people's bank accounts or used to pay off debts - the plan will have failed.
And sending checks to people in good financial shape does little or nothing to increase overall spending. People who have good incomes, good credit and secure employment make spending decisions based on their long-term earning power rather than the size of their latest paycheck. Give such people a few hundred extra dollars, and they'll just put it in the bank.
In fact, that appears to be what mainly happened to the tax rebates affluent Americans received during the last recession in 2001.
On the other hand, money delivered to people who aren't in good financial shape - who are short on cash and living check to check - does double duty: it alleviates hardship and also pumps up consumer spending.
That's why many of the stimulus proposals we were hearing just a few days ago focused in the first place on expanding programs that specifically help people who have fallen on hard times, especially unemployment insurance and food stamps. And these were the stimulus ideas that received the highest grades in a recent analysis by the nonpartisan Congressional Budget Office.
The state of the economy is particularly uncertain at the moment. The pace of economic growth slowed in 2007, and there are strong indications that it will slacken further in 2008. In CBO’s view, the ongoing problems in the housing and financial markets and the high price of oil will curb spending by households and businesses this year and trim the growth of GDP. Although recent data suggest that the probability of a recession in 2008 has increased, CBO does not expect the slowdown in economic growth to be large enough to register as a recession. [emphasis added.]Though they say elsewhere:
Strong indications suggest that economic growth is slowing and will remain sluggish for much of 2008. Most professional forecasters are continuing to project very slow growth, as opposed to an outright recession, this year. The risk of recession is elevated, however, and some respected economists believe that the probability of a recession has now risen to 50 percent or greater. [emphasis added.]The CBO continues:
And so what does the CBO have to say about that "lump sum rebate" that may or may not be necessary for a recession that they say may or may not occur?
Discretionary fiscal policy stimulus (that is, legislative action aimed at providing stimulus) may not be necessary to avoid an outright recession, if most current forecasts are correct. Nonetheless, policymakers may choose to proceed with a stimulus package to bolster a weak economy and as insurance against the elevated risk of a recession. Some economists advocating a stimulus also believe that a recession, if it occurs, could prove to be unexpectedly deep; a fiscal stimulus would help reduce the severity of a recession, should one occur.
Effective stimulus does not necessarily require addressing the source of economic weakness directly; instead, it requires strengthening aggregate demand.
Now take a look at what Jack said. He didn't like the idea of rebates being sent to people who pay "little or no federal income tax." No word, of course, on whether these folks pay payroll taxes.
Linking the size of the rebate to tax liability—such as returning a fixed proportion of taxes paid—substantially reduces the cost-effectiveness of the stimulus. It would place much of the government’s revenue loss in the hands of households likely to save much of the rebate. Fixing the rebate’s size or setting a relatively low maximum amount per household or person would concentrate more of the aggregate cut among lower-income households, who are more likely to be up against credit constraints and thus to spend any additional resources. Making the rebate refundable would further boost the cost-effectiveness of the stimulus.
To the extent that the rebate depends on incurring tax liability, the choice of tax base is significant as well. A rebate based on income tax liability would, for instance, reach fewer families likely to spend it than a rebate based on payroll tax liability. A large number of lower-income families incur no income tax, and many others pay more in payroll taxes than income taxes. As a result, their income tax liability alone may be insufficient to be eligible for the full rebate even though their payroll tax liability is.
And I think that's the point of Jack's spin. In the end, however, an economic stimulus package should be designed to stimulate the economy. Getting tax rebates (however defined) and/or unemployment benefits to people who will actually spend the cash seems to be the thing to do. Too bad politics got in the way.
I'll end this with Krugman's analysis:
There was also some talk among Democrats about providing temporary aid to state and local governments, whose finances are being pummeled by the weakening economy. Like help for the unemployed, this would have done double duty, averting hardship and heading off spending cuts that could worsen the downturn.
But the Bush administration has apparently succeeded in killing all of these ideas, in favor of a plan that mainly gives money to those least likely to spend it.
Why would the administration want to do this? It has nothing to do with economic efficacy: no economic theory or evidence I know of says that upper-middle-class families are more likely to spend rebate checks than the poor and unemployed. Instead, what seems to be happening is that the Bush administration refuses to sign on to anything that it can't call a "tax cut."
Behind that refusal, in turn, lies the administration's commitment to slashing tax rates on the affluent while blocking aid for families in trouble - a commitment that requires maintaining the pretense that government spending is always bad. And the result is a plan that not only fails to deliver help where it's most needed, but is likely to fail as an economic measure.
The words of Franklin Delano Roosevelt come to mind: "We have always known that heedless self-interest was bad morals; we know now that it is bad economics."
And the worst of it is that the Democrats, who should have been in a strong position - does this administration have any credibility left on economic policy? - appear to have caved in almost completely.
Yes, they extracted some concessions, increasing rebates for people with low income while reducing giveaways to the affluent. But basically they allowed themselves to be bullied into doing things the Bush administration's way.
And that could turn out to be a very bad thing.