Tuesday, February 17, 2009

The Stimulus, Part Two: The Real Issue

The debate over the stimulus during the past few months focused on two big issues: (1) the composition of the stimulus, the shares for tax cuts and spending and (2) the size of the stimulus, $700 billion, $800 billion, $900 billion, or more.

First, the composition of the stimulus. The ratio of tax cuts to spending is about 40:60. But this greatly exaggerates the fraction going to tax cuts. The tax cuts consist largely of credits for low- and middle-income households, an increase in the earned income tax credit, and other credits (credits are cash payments or subsidies for low- and middle-income households, not real income-tax cuts). The law also raises the exemption in the Alternative Minimum Tax to keep millions of middle-income households from paying higher taxes. Tax incentives for business are a much smaller portion of the stimulus. Republicans and conservatives favor tax-rate reductions while Democrats and liberals prefer tax credits, which means the latter secured the vast bulk of the “tax cuts.”

Few Republicans and conservatives are happy with any part of the spending package, whereas Democrats are generally pleased with the mix and timing of the proposed expenditures. Apart from the merits of specific expenditures, they are disproportionately directed at traditional Democratic constituencies. The largest are Medicaid health care for the poor ($87 billion), direct aid to the states for local public schools ($45.6 billion with teachers’ unions the beneficiaries), infrastructure ($61 billion, labor unions), greater unemployment benefits (workers), more food stamp benefits (the poor), job training (workers), science (professors in leading universities), and investment in green technology (environmentalists).

Second, the size of the stimulus. To secure passage, Democrats required three Republican votes in the Senate to prevent a filibuster. The process that achieved the final result was a charade. The House bill was a tad over $800 billion. The Senate added a number of measures to raise the package past $900 billion. The “gang of three,” Maine’s Olympia Snowe and Susan Collins and Pennsylvania’s Arlen Spector, that provided Democrats with the required 60 votes, postured as fiscal conservatives, insisting that the stimulus be cut by $100 billion or more. The Democrats were ready to grant the threesome this gesture because the final $787.5 billion package was quite close to the original numbers in both houses. Moreover, the Democrats will likely be able to restore some of the deletions in supplemental bills or clauses attached to other appropriations.

Many economists and analysts criticized the stimulus as too small, too large, lacking incentives, failing to address pressing infrastructure and social needs, the timing of spending, and others. None of these concerns was particularly important in the architecture of the final package. The purpose of the stimulus was not so much to halt the economic decline as it was President Obama’s and the Democratic party’s payment to the various constituencies that helped them get elected and to support their re-election bids in 2010 and 2012.

No comments :