Don't Wait to Boost the Economy

Almost overnight, the conversation in Washington has moved from placing odds on a future recession to the likelihood that one is already here. In other words, the politicians and policy wonks have caught up with the bulk of Americans, who've seen this coming for months. Now the wrangling is over what to do about it.

President Bush and his Congressional allies are shamelessly using the occasion to push for an extension of tax cuts for the richest Americans beyond the year 2010. They must think no one is paying attention: It doesn't take a PhD to see that a tax cut in three years will do absolutely nothing to pull us out of this current mess.

What's needed is immediate action to keep average people working and consuming so that the entire economic machine doesn't freeze up, pulling the country into an ever-worsening spiral of joblessness and shrinking consumption. That's why you're hearing economists talk about a "timely and targeted" stimulus package that will quickly put money into the hands of people who will spend it. Beef up demand, and businesses will follow by raising output.

Solid proposals for doing so are already out there: The Economic Policy Institute, where I now work, issued a comprehensive plan on Friday (read it here). Former treasury official Lawrence Summers has a proposal, as do the three top Democratic presidential contenders (here, here and here). Details vary, but all call for pumping billions of dollars into the economy, starting within the next six months.

What's the urgency? Why not just wait and see what happens, as some have suggested?

Here's one good reason: An economic stimulus works best at the beginning of a recession, while there's still a functioning economy to work with. Since recessions are declared based on data that is already old, we don't know with absolute certainty that they've started until after the fact. By then, pessimism, even despair, has taken root, and the road back becomes much more difficult.

It's like fighting the flu: Ignore the early signs (rising unemployment, slumping retail sales, pessimistic projections from Wall Street), and you're likely to be in bed twice as long, with a fever.

If that's not reason enough, here's another: Most of the stimulus proposals, including EPI's, do more than simply push out money in the form of tax rebates. They extend unemployment benefits, or help avoid foreclosures, or subsidize heating oil through the winter. They speed up needed repairs to crumbling schools and bridges, jump-start investment in green energy programs, and help states deal with plummeting tax revenues without cutting essential services.

By another name, this kind of stimulus - which offers immediate protection to the most vulnerable while minimizing disruption to all Americans - might be called good government.

Sure, it will take a lot of federal money - more than $140 billion, or about 1% of GDP, in EPI's plan. But in the long run, that expense will be mitigated by tax revenues from jobs created or saved. More important, an immediate investment means the pain of the coming recession will almost certainly be less intense than it would be otherwise.

EPI Policy Director John Irons offers a third pragmatic reason for fast action: Less time for special-interest lobbyists. "Around here, a package like this is known as a Christmas tree," he tells me. "Everyone wants to hang something on it." Better to get the money out quickly to where it will do the most economic good, instead of weighing it down with political paybacks.

Comments

[JohnCitizen]

THE SUPPLY-SIDE SCAM

George Bush"s $3 trillion dollar tax giveaway to the rich over the past 7 years has been a disaster for average Americans. Supply-side (trickle-down) economics is a bogus theory promoted by those who benefit from it. In a mature capitalist system, supply side never rules, it"s always the demand side of the equation that governs growth and well-being. Think about the 1930s Depression, General Motors had plenty of supply, but demand evaporated.

Previous U.S. economic downturns have been cured with only $200-300 billion in tax cuts targeted to the middle class, because the consumer (the great middle class and 2/3rds of the economy) spends that tax cut and primes the economic pump. But George Bush has raised the debt that our children and grandchildren will have to pay from $6 trillion to over $9 trillion for current economic growth (i.e. we all get trickled on, as the rich spend some small fraction of their gains). Unfortunately, this growth is largely and uniquely without wage gains, and so has shrunk the middle class that makes America strong and great. Also, this growth has already over ($3 trillion flushed down the toilet and gone!), as the FED has had to cut interest rates because recession is looming. Massive debt has led to a weak dollar, which is now at record lows vs. other major currencies because of FED interest rate cuts. In turn, the record low dollar has produced record oil prices ($100/barrel); and any additional needed FED interest rate cuts could cause a free fall in the value of the dollar, guaranteeing recession or worse, stagflation.

The middle class is slowly being tapped out, as home values (most of their net worth and the credit card of last resort) are falling in price, and a considerable number of homeowners are heading for foreclosure. With the rich-poor divide increasing, we"re headed toward previous shining examples of trickle-down economics: South America of the recent past and feudalism in the Middle Ages. SUPPY-SIDE ECONOMICS IS NEW FEUDALISM AND SERFDOM!

[suki21693]

"help avoid foreclosures"
For people who live outside DC the average salary is around $60,000 and in a couple of years time the purchase price of an average house went from something in the 300s to something in the 600s. In spite of all the talk about the sales slump, the housing market is still overvalued. Maybe some of these houses NEED to be foreclosed on to get the prices back down to a reasonable level.
I know, heartless.

[Wulfstan]

All that printing more dollars will do is increase inflation, which results in the devaluation of the dollar.

People need well paying jobs so that they can buy consumer goods to stimulate the economy. The problem with concentration of wealth in few hands is that they do not spend the wealth, they invest it - in China.

[fourex]

The best stimulus would be to remove Bush. In seven years he has paid for nothing and created over $3 trillion new debt.

[olephart]

"Details vary, but all call for pumping billions of dollars into the economy, starting within the next six months."

"it will take a lot of federal money - more than $140 billion"

"It's like fighting the flu"

Sounds Great! Where's the money coming from? Borrow it from China? Aren't we already borrowing $500,000,000,000 a year more than we're taking in? Print it? Isn't that what the Federal Reserve is doing even now, printing money and propping up the Banks? Stimulate by spending? We are spending, we're spending money faster than any time in our history. Money is going through the Federal Government like crap through a goose. Lower interest rates? By historical standards, they're already low! They're lower right now than through most of Clinton's Presidency and he had full employment, record growth and balanced the budget!

Your prescription is just what the doctor ordered for a case of the flu but you've misdiagnosed the patient. The economy's got cancer. It's the most malignant type of cancer. It's Acute Bushapheliosis Greenspanblastoma. It is caused by combining insatiable greed, incompetence, immorality and power with an Ayn Rand/Milton Friedman philosophy.

The nation has been going through a drunken orgy of spending both Public and Private. The means to support this spending, productive jobs, has been exported. Earnings have been replaced by consumers selling their houses back and forth to one another, spending the proceeds as if they had earned it and creating nothing but debt. The Government has replaced its tax income with debt. Your solution is debt and spending. That is the cancer you should be fighting! All the opium in the World won"t cure cancer, it just dulls the pain as you die.

[not one of the sheep]

Enough of the talking points. The American people are the problem. The government can't regulate stupidity. People are maxed out on their credit cards, overextended on their mortgage payments, and and spending like there's no tomorrow on crap they don't need. Keep the idiots in congress and the WH out of the way and let them reap what they sew. The great depression was extended by years by the government interference. It will be the politicians fault, dem and repub, if they try to fix this and things will get ugly.

[Pdubya]

we've kicked the can long enough nancy.

sooner or later the can turns into a molten lump of tin.

we have one of two choices:

- run this economy into the ground by accepting our current fiat monetary policy, subsequently going through a deep recession and perhaps depression, eventually giving way to a globalist, larger fiat money system - the Amero, or

- return to our constitutional monetary system:

a commondity backed currency or hard currency

only congress shall issue money


scary version?

global fascism in the form of corporatism

or

a fight to national sovereignty, beginning with our economic freedom through the constitution.

[leftLibertarian]

The best way to boost the economy is to eliminate the IRS.

[FloaterBall]

Taxes will have to be raised, sacrifices will have to be made, and these unpopular chores will be left to the democrats. Who will then be demonized for all the hardship they've caused, putting a Republican in the WH in 2012. And so it goes. Same old song and dance, nothing really changes, the rich go dancing along, the middle class pays the band. It's a new year, I'd like to be more optimistic, but I expect nothing from our current political parties.

[fran]

Recession is the least of it Nancy,we
are on our way to becoming a third world country under this administration!

[OkieMon]

How about a big tax cut to the middle class, where it will really do some good. Oh, and get out of Iraq to pay for it.

[lbsaltzman]

I am afraid this prescription isn't that much better than what the Republicans are offering. The world can't afford for Americans to continue to consume as we have been. It is unsustainable. What is needed is a stimulus that is applied to creating jobs that will help with global warming and peak oil.

Massive investments in solar and wind would be part of the equation, but also important is a committment to relocalizing our economy and bring jobs back home. We need to encourage small farmers, particularly organic farmers to produce food for local markets. The list goes on and on, but the point is that the stimulus has to be about real productivity and not just creating jobs to stimulate the consumer economy.

[Mr.Fitz]

I agree with much of what you say but a couple of your comments seem to be at odds with each other. First, you say that what is needed is to keep average people (whatever that is) working and consuming. To me, that means a huge tax cut for the middle class. Fine. But then you go on to talk about the "good government" proposals. While I agree that these are things government should do, they don't seem to be the kind of things that will stimulate the consumer economy. One idea is a tax incentive for businesses--if you hire someone unemployed (not just looking for a better job), you get a tax break. But this combined with a middle class tax cut of the kind that would have any effect means taxing wealthy individuals. The current administration would seem to be against this kind of thing.

[joebaggadonuts]

You realize that you are asking the same people who want to wait for Climate Change to flood NYC, Miami, etc., before taking action to now do something to avert a recession. These are the same folk who think that any government action is money stolen out of their pockets at the very least and probably the work of the Devil. You know that, right?

Nice try.

[nads2985]

Tax cuts and rebates are not the answer. Increasing the budget deficit by giving people cash now is stealing from future generations, who will have to pay off the growing national debt. It is just delaying the inevitable - we have to pay back what we've borrowed, and, at some point, this means we need to increase taxes. This is simply redistributing wealth from future generations to ourselves. This kind of borrowing, with little thought of how it will be paid back, is incredibly irresponsible and partly to blame for how we got to this point.

The only responsible deficit spending is for investments that will pay off in the future. What we need is a new New Deal.

The US has fallen behind other countries in infrastructure, in telecommunications, in transportation, in education. As this summer in New York and Minnesota ably demonstrated, our infrastructure is literally falling apart. Invest in fixing and improving it, and we can create jobs now, which will put money into the economy, as well as pay off in the future by increasing American productivity.

Fiscal stimulus should be aimed at putting money into the economy where its value will be subjected to the largest multiplier, and provide the largest dividends. This means creating jobs and improving ailing sectors of the economy, not just forking over cash on the assumption that it will be spent, and how it's paid for can be dealt with later.

Senator Edwards, and to a lesser extent, Clinton, seem to understand this and have incorporated this thinking into their proposals, but neither Obama or the Republicans seem to have gotten past the idea of cutting taxes as the answer to all economic problems.