January 23, 2008
Econ Watch: Throwing $$$ At The Problem
Yesterday, President Bush and the leaders of his political opposition, Harry Reid and Nancy Pelosi, strongly signaled that they were on board with the outlines of the White House's economic stimulus proposals. That may be by necessity, since all parties are under intense pressure to jolt consumers and businesses into spending again.
Though Republicans and Democrats in Congress are still quibbling over who will get the tax rebates -- everyone, or just those who pay income tax -- the global market chaos of this week is spurring them to make a deal, fast. "There are no issues of disagreement right now," House Minority Leader John Boehner told reporters yesterday. Though Bush's plan doesn't include rebates for low- and moderate-income workers who pay more in payroll tax than income tax, there are signs that Republicans can be persuaded to include those groups.
"It must be broad-based. To be effective, the package must reach a large number of citizens," Treasury Secretary Henry Paulson told the U.S. Chamber of Commerce in a speech yesterday. The Washington Post interpreted Paulson's selection of the word "citizens," rather than "taxpayers," as a sign that the White House is also willing to expand coverage of its tax rebates.
The Democrats' case -- that low-income people who aren't eligible for those $800-$1,600 checks not only need them the most, but are more likely to spend them immediately -- is a compelling one. But before we go there, maybe lawmakers should explain why mailing out checks to millions of Americans is a good idea in the first place.
Most economists agree that the Bush administration's post-9/11 stimulus package probably averted a deepening of what turned out to be a pretty shallow recession. One of the key components, an extension of unemployment benefits, was a lifeline for many Americans who found themselves suddenly without jobs, particularly in New York City. The president and lawmakers are on board with a similar extension this time around -- though nationally, unemployment remains relatively low -- along with an expansion of the food stamps program -- at a time when food banks are reporting demand they can't meet and a new class of steadily-employed-but-struggling clientele.
But a 2002 study [PDF] by Alan Auerbach, an economist at the University of California at Berkeley, found there was "little evidence" that the effects of stimulus packages "have provided a significant contribution to economic stabilization, if in fact they have worked in the right direction at all."
It's useful to compare the current conditions on the ground to the post-9/11 environment. The tech bust was already under way when terrorists hit the Twin Towers. Reverb from the attacks basically acted as a catalyst for an already existing trend: Companies shed jobs, subsidiaries and units, or shut down entirely much quicker than they otherwise would have.
But the dotcom bubble burst was mainly a bicoastal phenomenon. In comparison, the current housing implosion is virtually blanketing the nation's economy. Homes are depreciating in value across the country, 46 states are adding jobs more slowly than they were two years ago, and 23 states saw their economies shrink in December, according to the Federal Reserve Bank of Philadelphia [PDF]. Seventeen states lost jobs outright, and unemployment in Michigan, once the emblem of American productivity, is as high as 7.6 percent.
Global markets are having a very unhappy new year so far because of heavy losses reported by big banks including Citigroup, Merrill Lynch and UBS. But no one expects the bleeding to stop at their Q4 2007 results. Analysts suspect we're anywhere from two thirds to less than half of the way through calculating the total losses from the subprime collapse. That spells more negative write-down reports, more turmoil on Wall Street and global markets, and more investor and consumer uncertainty.
When Bush and others talk up the "resilience" of the U.S. economy, they aren't just spinning. The Dow rocketed to record highs earlier last year. U.S. stocks have soared since recovering from the 9/11 attacks (see chart here), and overall growth has been pretty explosive. There's some concern that we're still in a bubble. (Merrill Lynch's David Rosenberg says stocks are overvalued by 10 percent.) That means the Dow will have to come down as the economy rights itself.
Though psychologically important, it's not clear how much the current market turmoil affects most Americans, especially since their investments tend to be of the long-term variety (401[k], etc.) . As many economists have noted, big-bank investors and those losing homes are the only classes of Americans directly impacted by the crash. Many of those struggling homeowners borrowed beyond their means in the first place by signing onto loans they couldn't ultimately afford. It stands to reason that those debt-loaders would have eventually run into trouble anyway.
Which brings us back to those checks. With gas and food prices already so high, plenty of Americans could use some extra help this winter. But even if Bush is able to sign off on a stimulus bill by the Presidents Day recess, as hoped for, the IRS probably wouldn't get checks based on 2006 filings out until April or May at the earliest. (The post-9/11 rebates were six weeks-plus in coming.) Nor is it entirely clear that the bulk of the middle class would immediately put the cash back into the economy via spending.
"In 2008, many more households are grappling with excessive debt, making it likely that a bigger share of any rebates will be used to pay down loans rather than increase spending," Financial Times (and National Journal) columnist Clive Crook noted this week. All the more reason, he argues, to target the checks to the poorest Americans, even if they don't pay income tax.
Jared Bernstein of the liberal Economic Policy Institute think tank concedes that the problems plaguing lower-income Americans precede the subprime collapse, but argues that earmarking them for rebates instead of more affluent workers is a smarter way to move economic growth.
"This economy is 70 pecent consumption," Bernstein said in a phone interview. "This type of stimulus boosts consumption that otherwise wouldn't be made.... That's why it's important to target lower-income people. For Americans who are not income restrained, you won't get the bang for your buck because they could just as easily save it as spend it."
Still, there is a some cause to suspect that the tax breaks-laden stimulus package will have more political, as opposed to economical, value. "There is not yet any proof of a recession, defined as two straight quarters of negative growth," the Washington Post ed board cautioned on Jan. 11. "Any stimulus package would have to kick in just when economic data confirmed a recession and would have to deliver dollars quickly to those people most likely to spend them on new goods and services. It would also have to be offset by future spending cuts or revenue increases to avoid adding to the long-term deficit. Congress does not usually work with this degree of precision, which is why it's preferable to rely on the fast-acting Fed and its independent experts."
Indeed, Wall Street seems pretty mollified by yesterday's emergency three-quarter-point rate cut, and more relief will come next week as the Fed is expected to cut rates a further quarter percent at its regular meeting. Plus, there are long-term dangers in rushing a legislative fix.
"My fear is we are going to pass a package that is good politics but bad policy," House Budget ranking member Paul Ryan, R-Wis., told CongressDaily today (subscription).
Tom Firey of the fiscally conservative Cato Institution recently observed, "Many of the specific actions initiated by stimulus packages are hardly stimulatory -- extending unemployment benefits or launching major government construction programs requires several months to several years (and sometimes even decades) before the federal monies hit the economy."
It's an election year, which means there is about zero chance that the forthcoming stimulus package won't contain plenty of rebate checks and tax breaks for businesses. (Listen to this NPR interview with George Mason University economist Bryan Caplan for an explanation of why letting politics drive economic policy is particularly stupid.) In late 2006-early 2007, when the Dow was roaring along, we scratched our heads over poll numbers (subscription) showing consistently pessimistic attitudes toward the economy. Are average Americans the canaries in the coal mine? Probably not, since the housing implosion took even the experts by surprise.
But that discomfort many Americans were feeling wasn't necessarily all in their heads. Incomes haven't kept pace with inflation, suggesting that amid recent boomtimes households have been experiencing recessions of their own. The ongoing transition of the U.S. economy away from manufacturing leaves more and more undereducated Americans out in the cold. Even if insta-cash from the government has no measurable effect on the overall economy, it will probably have positive effects on households. But those rebates hardly seem a long-term cure for what is quickly becoming a well-entrenched ill.
Posted at 4:56 PM
Posted to:
Ben Bernanke, Bush Administration, Campaigns, Congress, Economy, Federal Reserve, President Bush, Taxes, WH 2008
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