Faux Stimulus Is No Stimulus

For the past month and a half or so, the Senate has been trying to pass an extension of unemployment insurance. The problem is clear: 7,000 unemployed workers are running out of benefits every day, 400,000 exhausted their benefits at the end of September, and 1.3 million will exhaust them by the end of the year. The House passed a relatively weak extension, which offered federal extended benefits only to states with unemployment rates higher than 8.5 percent. For a moment -- a sweet and satisfying moment -- the Senate, designed to represent the interests of entire states, seemed poised to live up to its design: Democratic leaders announced that benefits would be extended 14 weeks in all states and an additional 6 in those with unemployment rates greater than 8.5 percent.

Then, of course, the stalling began.

Republican leaders have tried to force votes on defunding ACORN, on illegal immigrants, and on using stimulus funds to pay for the unemployment benefits extension. But worse, the simple unemployment insurance extension measure has been transformed into a worthless mini stimulus package that threatens to suck the air out of what little momentum currently exists for additional stimulus.

The bill extends an $8,000 tax credit for first-time homebuyers until April of 2010. This tax credit was originally included in the economic stimulus package and was set to expire at the end of November of 2009. The new provision makes families earning up to $225,000 eligible for the credit for purchases of homes worth up to $800,000 and creates a smaller credit for homeowners who have lived in their house for five years or more and are buying a new one. The legislation also makes larger businesses eligible for expanded "carryback loss" authority. This tax measure allows businesses to offset past profits with current losses in order to reduce tax liability.

In addition to the benefit to individual households, unemployment insurance provides significant economic stimulus. The unemployed tend to spend all of their benefits and quickly, providing an important economic jolt. Allowing unemployment benefits to expire for hundreds of thousands of families would undermine the successes of the American Recovery and Reinvestment Act and slow the nation's economic recovery.

In contrast, extending the tax credit for first-time homebuyers and, particularly, expanding the credit to wealthier households and to current homeowners would do little to stimulate additional economic activity. The credit is not only susceptible to fraud but has primarily benefited households which would have purchased a home even without the tax benefit. This means that the credit is poorly targeted and an inefficient use of government funds at a time of increasing concern about budget deficits. It also continues the federal government's subsidization of homeownership, which helped cause the housing crisis. The carryback loss provision is a also a poorly targeted provision, receiving a "C" in the nonpartisan Tax Policy Center's analysis of the stimulative effect of tax measures. Finally, these two measures are offset by a tax gimmick, meaning that they do not even constitute deficit spending.

For all their efforts to promote additional stimulus, thought leaders like Krugman and Reich seem to have convinced policymakers only that the "stimulus argument" is an effective way to make the case for government spending that benefits special and wealthy interests.

More stimulus is needed. Our fiscal deficits are not caused by excessive government spending, nor has government spending caused a cutback in private sector spending. But faux stimulus of the sort included in the unemployment extension bill, coupled with fiscal austerity hysteria, mean that additional stimulus is unlikely. Our politicians are fooling us with legislation that looks like stimulus, but sure doesn't quack like one.

 

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Comments

[Deltau]

Your advice is for the USA and well-placed. DaveMike has a good idea but "in addition to" not "instead of". Most of the analysis and commentary on these topics aims to assign the blame or solution to some ideological body - Dems/Repubs; Libs/Cons. What's the pupose of democracy? Who decided that to be for the continuing good of the people is a crime against humanity?

DaveMike if you believe what you say about education how can you say what you do about supporting citizens rather than directing your wrath at the housing credit give away?

[davemike]

Good lord Harry. I've lost count of the number of articles you've written on the need to expand unemployment benefits. My biggest problem is that unemployment benefits are an expenditure, and not an investment. In a previous article you noted that unemployment duration is growing because of the "mismatch" between skills currently demanded and the skills of the unemployed. From this, how you conclude that we should extend unemployment benefits is absolutely beyond me. It would seem to me that an investment in education for those without the necessary skills would be a far better use of government funds then more expenditures. Afterall, the great Gary Becker basically won a nobel prize for demonstrating that education has the highest returns on investment.

You've also claimed that extended these benefits is a good use of stimulus funds. Yet you've done little to no analysis of the cost of these benfits (deficit spending). So I have trouble merely accepting the statement that this is "good stimulus" merely because you say so.

An investment in education yields higher worker productivity, higher salaries, and higher tax recepits, both from individuals and corporations. You seem like a fairly progressive guy, so I'm guessing you probably have a few other projects you'd like to spend tax dollars on, so I'm surprised you want to make unemployment an easier proposition to accept than help get people working again.

[Harry Moroz - Huffpost Blogger]

Well, Dave, as soon as benefits are extended, I'll stop writing about the need to extend them.

First, in the context of actual hardship and economic pain now, an investment in "education" for those without necessary skills is not going to do all that much.

Second, the multiplier effect of spending on UI benefits is $1.63 for every $1 spent. Not bad. Is deficit spending now on, say, green jobs training better in the long run, of course. But compared to the housing tax credit and expanded carryback loss, UI benefits both provide some sort of (yes, temporary) economic jolt and relieve hardship. UI benefits can prevent households from dropping into complete economic oblivion, which is exactly good for our long-term fiscal outlook.

And, as a fairly intelligent guy, I'm surprised that you're so offended by the prospect of spending $2.4 billion on extending UI. You'd rather ignore the $20 billion being given away to businesses and to homeowners who don't need it?

[davemike]

Harry, how have you concluded the multplier effect of unemployment benefits to be 1.63? And is this a widely accepted fact amongst economics or merely some argument put forth by an economist(s) favored by progressives? Please do provide me with such a link.

You've combined 2 arguments into 1. The first is that UI benefits are effective stimulus. The second is we have a moral obligation to relieve the economic hardship suffered by others.

As a humble, God-fearing Christian, in challenging times like this I must return to the bible: "give a man a fish, he eats for a day, teach a man to fish, he eats for as many days." Of course, to this I would add, teach a man to fish, and he will buy a boat, possibly open a business, employ others and pay lots and lots of taxes. You tell me which of these has a greater "stimulus" and does a better job relieving economic hardship. In three or six months, whenever your new UI benefits expire, we are still going to have the same problem. Many people have no job skills, and we need to provide a mechanism for them to obtain this skills while avoiding starvation, rather than merely delaying the day of reckoning. Were you to package expanded UI benefits that can only be received through enrollment in government paid for job training/education, that is something I may find interesting (It would also be more expensive).

[davemike]

{third part}

Harry, I'm against all wasteful spending. Not only do I think we should get rid of the homebuyer tax credit, I also think we should get rid of the mortgage interest tax deduction. As I've previously posted, I 'm highly skeptical of the benefits of home ownership so I'm surprised you think that I'm not even more outraged by that moronic policy. (My skepticism arises from the fact that you cannot study the benefits of home ownership in isolation, only in the presence of other factors of the inhabitants, such as employment, income level, education level, marriage status etc. essentially, you cannot study the benefits of home ownership via the scientific method so you cannot defnitively say anything about home ownership. Of course this is a criticism of economics and most public policy in general)

[jhNY]

The free-floating anxiety on parade among the Tea Baggers has been reliable blog-fodder for many here, and mostly, the writers have chosen to portray these folks as addled and incoherent, which they are, and therefore insignificant--- which they are not. Look at the crowds they gather: Though there are plenty of young folks on hand, many atendees are older white folks with time during the workweek to carry their misspelled placards and shout at anybody in government who shows up. In other words, they are unemployed, or work part-time.

They represent a daunting challenge for the Democratic Party and for the fund-raising strategies of its leadership, because when one holds out one's hat to banksters to bankroll elections, one cannot respond to the need s of the populace unless one is willing to go against the wishes of his sponsors-- which so far, if the president is any example, one has been mostly unwilling to do. Older Americans will be the last to be rehired in the economy of tomorrow, if ever. And the value of their major investments-- their 401k's and their homes-- have eroded at a breathtaking pace.

Unless Obama enacts a massive jobs program, especially targeted toward older workers, he will see his party lose lose Congress in 2010, and the presidency in 2012. Becaase if the voting public cannot see that Democrats are more willing to address their fears and needs with more practical action, they will throw them out.