Politics Trumps Economics...And It’s a Good Thing!
Let’s face it, for most conservative Republicans, a stimulus package is a couple of Viagra washed down with a double malt scotch.
Even now, there are those complaining that instead of a temporary injection of tax cuts or spending to jump start our moribund economy, the best move is to make the Bush tax cuts permanent, an idea that fails stimulus 101 on each of the three t’s: timely, temporary, and targeted.
What’s fascinating is that no less an advocate of the Bush tax cuts than Bush himself appears to have eschewed this thinking. The stimulus plan coming out of the White House actually has some positive attributes.
How, you ask with great disbelief, did this happen? It’s simple: the politics of an election year trump the Robin-Hood-in-reverse economics that we usually get from this crowd.The White House plan hasn’t been fully announced, but the word on the street is that the biggest part is taking the ten percent income tax bracket down to zero for a year. The rest is baubles for business in the form of temporary tax credits.
Here are some good parts:
· At 1% of GDP (about $145 billion, the same as the EPI plan…glad to see those folks are cruising our web site!) the White House plan is of the right magnitude to offset the downdrafts from the housing meltdown and its spillovers. Our analysis suggests that this is the ballpark amount needed to jumpstart the stalled job machine.
· The plan is temporary, so the tax cuts don’t add to future fiscal imbalances.
· The White House’s willingness to not make this about permanent tax cuts is critical for moving the legislation out in a timely manner. If they tried high-jacking the stimulus debate for yet another run at that agenda, it would have been a deal-breaker for the Democrat majority in the Congress.
Here are some bad parts:
While the tax cuts are thankfully not wasted on those in the top income tier (cuts in stuff like dividend or capital gains taxes have very little stimulative bang-for-the-buck), the architects of the White House plan have still managed to screw up the targeting. As the CBPP points out: “This plan would bypass altogether, or provide only partial help to, the 45 percent of households — at least 65 million households — with the most modest incomes. Families of four below $40,950 would get partial help or nothing at all.”
Their tax rebate misses the target because it is based on income tax payments, and 22 million households pay no Federal income tax at all, though, if they work, they pay payroll taxes. Also, since the rebate is in the form of canceling your tax liability, those with minimal liabilities end up with minimal rebates. If your taxable income takes you just a few bucks into the ten percent bracket, you get almost nothing from this plan.
Yes, that makes the rebate less equitable, but it also undermines its effectiveness: the most income-constrained households are also the ones most likely to spend the money, so structuring the rebate this way will dampen its stimulative impact.
Allowing businesses to accelerate the deduction for new investments also underwhelms in this regard. According to the CBO’s review of the relative merits of various stimulus methods, “The last time such incentives were employed, the results were not encouraging.” What’s likely to hold back business investment in coming months is lagging consumer demand, not the cost of capital.
For the Dems, here’s some political advice (free advice: worth what you pay for it). It is said that a Keynesian is a supply-sider in a recession, and when it’s an election year, the stakes are of course higher for the incumbent party in the White House. So I’d say go ahead and push for a better-targeted package. Bush and co. are uniquely politically motivated to get the economy back on track and, given their congenitally lousy instincts on economic policy, they got the targeting wrong. In the interest of heading off this downturn, it’s worth getting this right.
What am I missing? I don't see the economy as any worse now than six years ago, after the first two years of disastrous Bush admistration. I had to eat a much worse contract in our negotiations in 2004 than the recent one we agreed to.
It's not the economy that needs stimulus, it is the large money that needs its panic soothed. The economy needs much more than stimulation, and has for several years. What it mainly needs is the folks currently in charge to be gone for a long, long, time.
We have been in recession since 2001, as far as I can tell. The risk now is depression, not some piddling recession. So a shot of adrenaline is far from sufficient. The patient needs a heart transplant (and I don't mean Cheney). The patient also needs some serious physical therapy.
January 19, 2008 2:52 PM | Reply | Permalink
Thank you Tom. Once you strip away the anecdotes much of this 'crisis' boils down as it generally does to 'rich people losing money'.
Speculators in real estate who didn't exit when the clear warnings were out there took a bath. Builders of McMansions who thought you could build everything on spec took a bath. Investors who thought that CDOs with high yields carried no risk took a bath. Well little of that is my problem.
The S&L 'crisis' could have been unwound with relatively few depositors losing a dime. After all deposits up to $100,000 per account were covered. Of course a lot of wealthy S&L operators would have ended up with nothing, and a number of people who have so much money that they couldn't manage to keep their balances below $100,000 per account would lose the excess balance. Which would be the normal outcome of an actual free market where the risk/return ratio was actually operative. Instead the principle of 'too big to fail' kicked in.
We'll see how this shakes out but I have a hard time seeing real Republican support for a plan that primarily benefits workers over capital by a capped tax rebate. What's in it for them?
January 20, 2008 8:52 AM | Reply | Permalink
deleted.
January 20, 2008 10:49 AM | Reply | Permalink
Not sure.
Martin Wolf in the FT had an interesting article this week. His logic went something like this.
Our form of capitalism requires our form of banking system.Or at least the demise of the banks right now would cause the demise of the system. But no banking system irrespective of its soundness can satsify a mass withdrawal c.f. It's a Wonderful Life. That's what would have happened once the first S&L went belly-up .Or the UK's Northern Rock.
So the banks have to be rescued.Even tho they brought it on themselves But then the same damn thing will happen again because bankers' I.C. is based on current earnings whereas their decisions take ,say , 5 to 10 years to play out.
From which this highly conservative thinker concludes that what's needed is, wait for it, regulation. Specifically bank ceo'sIC should be restricted to stock options with a matching delay.
Dunno whether his remedy will work but his diagnosis seems pretty good to me.
January 20, 2008 10:50 AM | Reply | Permalink
Those aren't voters so politically it's pointless. Democrats ought to be able to come up with a plan that puts tangible cash in peoples' hands. Let the Republicans sustain a veto of that!
January 19, 2008 3:01 PM | Reply | Permalink
Pardon?
Did you just say that those in the 10% tax bracket do not vote?
January 19, 2008 6:00 PM | Reply | Permalink
If we're making a purely political decision here, yes, they don't vote in anything like the numbers of the middle class. I'm not saying it's the best economic decision or delivering money to the most needy.
January 20, 2008 6:57 AM | Reply | Permalink
Everyone is in the 10% tax bracket for that portion of their income falling into that range. That is why everyone in the median tax brackets got the identical $300/$600 check in 2001. This proposal has that same effect, it gives me and Warren Buffett the same amount of tax relief.
January 20, 2008 8:55 AM | Reply | Permalink
It’s simple: the politics of an election year trump the Robin-Hood-in-reverse economics that we usually get from this crowd.
ummm, I stopped reading your post after this claim since America will be borrowing "the stimulus" and expect future generations to somehow pay it off.
as ron paul has asked: "how do you solve inflation with more inflation?" it's almost like a drunk taking a drink to cure his/her hangover.
To boldly go...
January 19, 2008 4:57 PM | Reply | Permalink
it's almost like a drunk taking a drink to cure his/her hangover.
I'll drink to that.
January 19, 2008 6:08 PM | Reply | Permalink
(hic) me too
January 20, 2008 4:55 AM | Reply | Permalink
I too am having problems with anything coming out of the White House in terms of "helping the economy".
Listen, $15 billion a month on the silly wars adds another $15 billion pounds of fecal matter that will require an enema to clear. Our military is drinking oil like a frat boy drinks beer, is that helping oil prices and by extension the economy? No. History provides several examples (England anyone?) of what disasters lay in store for nations who wage wars & bankrupt themselves in the process. We may or may not have finally dealt with Vietnam when Bush stuck it to us again with his ignorant WOT. We need a hell of a lot more than a quick boost that's for sure. The hull is full of holes and there are drunks on the bridge steering us straight into a reef. Handing out an extra 5 bucks to spend on our next shore leave seems... I don't know, silly?
January 19, 2008 6:02 PM | Reply | Permalink
So your economic stimulus plan is to end the War in Iraq? Actually, that's the only economic stimulus package I've heard that actually makes sense.
"You say I'm a dreamer. We're two of a kind. Looking for some perfect world that we both know that we'll never find." - Thompson Twins, "Hold Me Now"
January 19, 2008 7:29 PM | Reply | Permalink
Actually, that's the only economic stimulus package I've heard that actually makes sense.
It might make sense but not the dollars we need to solve this crisis. Dennis Kucinich envisions a "department of peace;" in my opinion, such an entity would prove that "peace investments" out perform "war investments" by a long shot.
To boldly go...
January 20, 2008 10:20 PM | Reply | Permalink
Several years ago, one of the well known Republicans, I cannot remember which one, advocated a one time 14% tax on all assets of anyone who is worth more than 10 million dollars. Yes, as I recall anyway, it really was a Republican. In other words, he wanted to confiscate 14% of the wealthy's wealth. He claimed the money obtained would pay off the national debt. Does anyone remember this proposal, and does anyone know whether such a tax/confiscation could work without throwing our economy into an uncontrolled spin?
January 19, 2008 6:06 PM | Reply | Permalink
Great idea. Because this economy is just dying to have 14% of all stocks being liquidated to raise cash and 14% of all commericial real estate value to be refinanced all at the same time. Oh and for every billionaire to take out a second mortgage to the tune of 14% of the value of his mansion and its contents. You want Dow 600, well I can't think of a better way to do it.
Who would be the asset buyers in this scenario? I mean I would love to buy that Cezanne or Monet but I don't think even an overnight infusion of 14% of all fine art into the market is going to get them down to my budget level.
I doubt that people in this asset class typically have even 1% of their assets in a straight cash instrument. Nor would banks be happy to see their cash reserves wiped out overnight. This proposal doesn't survive even the weakest reality test.
January 20, 2008 8:24 AM | Reply | Permalink
Your logic is not reaching outside our current system. Think a little deeper and you would see there are certainly ways to transfer wealth without the stock market going to 600, or any other such problems. No, the money in banks would not be lost. Many societies in history have made massive wealth distributions. It will happen here some day too. Oh, and by the way, your lightly veiled sarcasm is not becoming. Sarcasm is usually used by those who don't really understand a matter.
January 20, 2008 3:27 PM | Reply | Permalink
In 1999, Donald Trump proposed a one time 14.25% wealth tax on the net worth of individuals and trusts worth $10 million or more. Trump claimed that this would generate $5.7 trillion in new taxes, which could be used to eliminate the national debt.
Wikipedia link
Of course, the national debt is higher now, and if it was reduced, then the Democrats would want to spend more on health care , education and infrastructure. It's also a dangerous idea to even consider going to the people with money when the country really needs it. For those reasons, the Republicans would block any such plan. There are ample dollars around the world to readily buy up any assets if sold over a period of time. The NYSE has traded $100 billion a day in shares, the 5.7 trillion mentioned by Trump would be less than 3 months of similar trading volume. Discounting other assets, a 25% increase in share turnover on Wall Street alone for one year would be sufficient to pay the amount.
For the $10 million+ persons/trusts paying the one time tax, they would have the savvy to reduce paper losses from sales to a minimum. The federal government would not keep the money but use it to pay off government debt-it would go back into private hands for investment.
January 21, 2008 11:15 AM | Reply | Permalink
Given the current state of our economy, any politician who supports tax cuts should be removed from office. This is election year pandering -- and from both sides of the aisle. The White House is desperately trying to keep the ship afloat until November. And Democrats -- busily campaigning on the "change" platform -- are buying popularity with Bush's 2001 strategy of mailing a bribe to everyone in the country.
If our patriotic duty is to spend this extra $800, how, exactly, can Americans do so in a way that will stimulate the economy?
As noted above:
To nobody's surprise, virtually all Americans have the same top 2 expenses: food and housing. The impoverished will by necessity spend their impoverished 'rebates' to ease these 2 burdens. As for those who don't struggle each month to make ends meet, food seems an unlikely place to splurge. And I just don't see $800 as the tipping point for jump-starting new home sales.
Transportation is next on that expense list, but the forthcoming government payoff won't even cover a down-payment on a new car. And, besides, who's looking to finance anything right now, let alone the most wickedly depreciating asset of all? Anyone think this "stimulus package" will spike the decimated Ford Motor Co. share price?
On the off-chance that the predicted 50% of Americans will cash their checks and do what they do best -- consume -- let's face it: they'll buy new TV's and cell phones, shirts, skirts, and shoes, patio furniture, barbecue grills, and espresso machines.
NONE of which will be made in this country.
The bulk of our 'rebates' will be pocketed by foreign laborers (if they're lucky), foreign corporate executives, foreign governments, foreign exporters, OUR government, and wealthy domestic corporate executives, currently dodging their fair share of the tax burden; executives whose companies produce nothing except profits for investors, a growing number of whom are foreign.
Like the myth of "free markets," supply-side economics is a disproved theory. In practice, it cannot withstand the reality that temptation, weakness, and corruption are intrinsic obstacles to achieving our human potential.
tj
"Perhaps [parties are] necessary to induce each to watch and delate to the people the proceedings of the other. But if on a temporary superiority of the one party, the other is to resort to a scission of the Union, no federal government can ever exist." ~Thomas Jefferson
January 19, 2008 6:46 PM | Reply | Permalink
This cannot be repeated often enough or loudly enough, especially the part about "producing nothing".
"Wealth we can use" *must* involve production.
January 19, 2008 8:23 PM | Reply | Permalink
Currently one of the federal taxes we pay is running a long standing surplus. That is the proper place to do the temporary zero tax rate. And, of course, that is FICA. Everyone who earns any money at all, and has an honest employer, pays FICA taxes on every dollar of it. Even a 6 month zero FICA tax rate would stimulate the economy more than any other single thing that could be done.
Hoppy in Sacramento
January 19, 2008 7:13 PM | Reply | Permalink
Are you suggesting that both the employee and company portions of FICA be zero for the next six months? I like that idea, but politically, there may be too many on Social Security who would object.
I posted above about the one time 14% tax on the wealthy. This morning I googled it up and found it was Donald Trump, and his suggested rate was 14.25%. Why wouldn't Trump's plan work? He would tax all individuals and trusts with net worth over 10 million. I like Trump's plan and would take it radically farther: Our country is the richest in the world with great natural resources, a powerful infrastructure and a good and ample work force. There is absolutely no real reason for an economic crisis. The problem is really only on paper. We owe each other, and others in the world money - wich is really only paper. Tear the paper up and start over. Wipe out all debt, period. Nobody owes anybody anything. Starting tomorrow, your house, car and credit cards are all paid off. Everybody starts over at zero. Who loses in this equation? The money lenders who will be holding torn up notes. And, incidently, nothing I own would get paid by this idea.
January 20, 2008 7:35 AM | Reply | Permalink
Who loses in this equation? The money lenders who will be holding torn up notes.
Uh, anyone who invests in bonds or in mutual funds with bonds will lose by this. Anyone with money invested in a bank will likely lose, too, as the banks will have nothing to pay them back with if all their loans are cancelled.
In addition, no one will be willing to loan out money after this, for fear that debt forgiveness will happen again, so those who wish to borrow money will do it from black-market types who will use private enforcement to make certain that their debts are not wiped out by the government.
Moreover, this can only be done with American-held debt. We cannot wipe out foreign-held debt without the other countries retaliating by simply refusing to trade with us and by refusing to accept dollars.
"You say I'm a dreamer. We're two of a kind. Looking for some perfect world that we both know that we'll never find." - Thompson Twins, "Hold Me Now"
January 20, 2008 8:22 AM | Reply | Permalink
Currently Social Security is running a $200 billion annual surplus and has a $2.2 trillion balance in the Trust Fund. No one's benefits would be threatened by a temporary decrease in FICA.
Two how would that 14.25% tax work? Are you talking a tax on total existing capital? Or just on gains? Because they are taxed at 15% already, albeit only when gains are taken. And a 14.25% tax on the capital base is essentially confiscatory.
As for your Grand Jubilee tear up the paper idea, the notion that net lenders would be in any fashion willing to lie down with net debtors is as likely as the proverbial lion laying down with the lamb.
In practice your program leads in rapid fashion to state socialism, if nobody owes anybody anything all capital goods fall into the hands of the state at least until or unless credit markets reestablish themselves, you would own nothing more than what was under your immediate physical control.
I am all for sticking it to the Man but I don't think this vision of Socialistic Utopia is the way to do it. For one thing the Chinese Central Banks would be a little upset to learn that its $400 billion plus portfolio of Treasuries and $1.2 trillion total portfolio of dollar denominated assets simply vanished over night.
January 20, 2008 8:25 AM | Reply | Permalink
But the Social Security Trust fund isn't anything but papers in a notebook!
April 6, 2005
WASHINGTON – Using a government filing cabinet as a prop, President Bush yesterday played to fears that the Social Security Trust Fund is little more than a stack of worthless IOUs.
'Physically, the trust fund consists of 8-by-11-inch sheets of paper, fastened inside two notebooks and tucked in a drawer of a four-drawer filing cabinet at the U.S. Bureau of the Public Debt in Parkersburg, W.Va.' USA Today link The real money Bush squandered in Iraq.
January 20, 2008 7:13 PM | Reply | Permalink
Those already on Social Security, as I am, would not be affected either. Our payments are well covered by the FICA trust fund in any case.
Perhaps 6 months is too long for such a huge tax break, but 3 or 4 months might be all it would take to stimulate the economy enough. Of course this will never be done, because it would be a way to shift more of the overall tax burden from the lower and middle class to the upper income class, as it used to be. That would not sit well with our ruler class.
Hoppy in Sacramento
January 20, 2008 7:19 PM | Reply | Permalink
Exactamundo
Two points. While I doubt that any tax cut is self-financing, a FICA cut immediately recycles more than most others. 12.4% of every new payroll dollar created via a $145 billion or so cut in the way of maintaining/creating jobs flows directly back into the system, plus there is a multiplier effect from there.
Secondly. Currently Social Security is projected to run surpluses for the next ten years. Even moderate by historic standards growth extends that period of surpluses for years to decades, perfectly plausible economic assumptions could continue those surpluses for ever. A balanced examination of Social Security financials suggest that over the median term we will be ratcheting FICA rates down anyway, a temporary acceleration of that would do little harm (if any) to long term solvency.
(Parenthetically: we have allowed Social Security 'crisis' to paralyze our economic discourse. Amazingly small changes in initial assumptions are required to move the model from depletion in 2041 to depletion never. The battle over Social Security is not fundamentally numeric at all, it is instead ideological. Which is why you rarely see numbers discussed. Dates yes, lots of people can tell you that income is projected to lag cost in 2017. But by how much? And under what growth assumptions? Privatizers never want to go there and for good reason. Our views of the sustainability of tax cuts in the face of future deficits is hugely dependent on which way the Social Security surplus/deficit arrow is pointing ten years out. Yet just about no one is willing to talk about this using actual numbers even in theoretical terms.)
January 20, 2008 7:57 AM | Reply | Permalink
Another fake stimulus. One time Target shopping spree to stimulate the so called consumer confidence so that more people go out to shop and overspend. This is truly disgusting. Who will stop them? They are all on the bandwagon. All this is going to do is maybe give a fake bump to Wall Street. It will not fix anything. Only real jobs, real money in people's hands.
January 20, 2008 9:16 AM | Reply | Permalink
I should have read your post before putting mine up.
January 20, 2008 10:51 AM | Reply | Permalink
Am I the only liberal in the country who doesn't want a stimulus package? Maybe I'm just getting frustrated with our fake economy.
January 20, 2008 9:49 AM | Reply | Permalink
No you're not. The 'stimulus' package is actually one of Bush's 'surges.' He's very fond of surges.
According to Keynes an economy sliding from a peak calls for an increase in federal spending (and tax cuts and lower short-term interest rates to increase the money supply and expand credit) to stop the slide THE MINUTE IT BEGINS.
Possible to invest the $140 billion on our decaying infrastructure instead of a weekend shopping spree? Possible to invest $140 billion on alternative energy research and development instead of a weekend shopping spree?
No. Your fake economy demands shopping sprees aka a Bush surge.
January 20, 2008 12:19 PM | Reply | Permalink
I don't need a tax cut, we have all we need and want. However, there are needy people, and if the Federal Government can get some money to them I'm all for it.
I'm firmly against tax cuts for the wealthy and for the boys and girls in the corporate boardrooms.
January 20, 2008 10:52 AM | Reply | Permalink
Just for the record, a double malt scotch is not a luxury good superior to a single malt scotch. A "double" (or a double scotch) would be two shots, but then one wouldn't say double malt scotch, because there's no such thing as a malt scotch. A single malt is a scotch made from something good enough to hold up on its own. A blend, which is not, in contrast generally consists of more than two malts.
John
http://www.haberarts.com/
January 20, 2008 1:30 PM | Reply | Permalink
Does your comment about a double malt scotch have anything to do with the double Viagra mentioned by Bernstein in his opening sentence? If so, wouldn't the two counteract each other? Has anyone ever taken two Viagras? Wouldn't that be dangerous? I mean, they already warn that one can cause 4 hours of readiness. It seems that 8 hours is more than anyone would need.
January 21, 2008 2:34 AM | Reply | Permalink
Maybe if they all sobered up, for, say, a week, it'd all start to even out again? Maybe too much Chivas is the core problem, here.
January 20, 2008 1:32 PM | Reply | Permalink
I agree that one of the problems with tax cuts as a stimulus is that they can leak out of our system when they're spent on imports. That's why direct spending, like on infrastructure or aid to states or food stamps or UI, can be more effective.
If we are to cut taxes to stimulate growth, a payroll tax holiday also strikes me as a good idea. A number of folks I've spoken to about this say we'd be better off taking the money out of general revenue instead of the FICA accounts.
Re whether there's a recession out there and whether it's worrisome beyond ongoing, big structural problems: I think yes on both counts. It's true of course that the economy has already failed to deliver for lots of people below the top 10%, but recessions surely make things a lot worse, and when the economy sniffles, the least advantage catch pneumonia. See this and this.
It's true that we don't know for sure that the economy has contracted until well after the fact, but the signs are all there, ie, every variable economists watch to gauge such things is down, at least slightly. And even if we might dodge the official recession bullet, slow growth for a few quarters or more will feel much the same to many.
As for stimulus spending being just more of the same Bush-style throwing good money after bad, I take the point, but I disagree. There are too many eg's of times when we and others (Japan--though a lot more went wrong there too) blew this opportunity to implement a well-targeted, timely Keynesian injection when demand was sagging, and the costs were awfully high in terms of lost incomes. Of course, we can still screw it up this time...that's part of the point of the post. D's should push to improve the targeting of the Bush plan.
January 20, 2008 7:21 PM | Reply | Permalink
I can offer a suggestion for a stimulating packlage that is directed at future and infrastructure. The January, 2008 issue of Scientific American has a detailed Solar Grand Plan for investment in and deployment of energy installations. It explains how much it will cost, and where the money should come from. It shows that a solar future is achievable, and doesn't gloss over the complications.
Scientific American is conservative in engineering terms. Articles never are unsupported flights of fancy but serious nuts-and-bolts, more often than not.
January 20, 2008 7:41 PM | Reply | Permalink
Tax cuts hit the target the way a shotgun hits a battleship.
The economic problem is too many foreclosures, and no tax cutting scheme is going to prevent them. No tax cutting scheme is going to help the unemployed find new jobs.
Therefore, the first target should be this "moral hazard" nonsense, whereby homeowners are blamed for not signing better mortgages five years ago, and construction workers are blamed for not choosing recession-proof careers.
The stimulus should be a mortgage bailout for struggling homeowners, combined with a generous increase of unemployment compensation. There should be no tax cuts at all; the progressive income tax worked fine until conservatives start tampering with it.
January 21, 2008 5:16 AM | Reply | Permalink