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Harry Moroz

Harry Moroz

Posted: November 4, 2009 11:59 AM

Faux Stimulus Is No Stimulus

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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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