False Stimulation


Now that the government has spent billions bailing out Wall Street, political calculus — at least Barney Frank’s — demands that equal attention be paid to proverbial Main Street. Thus leaders in Congress and both presidential candidates have proposed economic-stimulus packages — swag bags of new spending and “targeted” tax cuts — as the election draws near. Not all of the proposed measures are objectionable, but none of them is likely to stave off a recession. Considering what we are likely to get out of this Congress, it is probably better to do nothing at all.

Earlier this week, House Speaker Nancy Pelosi went into meetings with other senior Democrats and emerged with a $300 billion stimulus package, the bulk of which consists of more tax-rebate checks. The government sent out $100 billion worth of these checks as part of the economic-stimulus package that passed last February. Upon signing the bill, President Bush called the package “a booster shot for our economy.” As of this writing, the patient appears utterly unresponsive.

That’s because, as we argued at the time, one-off rounds of rebate checks sent out during economic contractions tend to be saved, not spent. By contrast, permanent rate cuts — the kind of tax relief businesses and consumers can count on — tend to stimulate economic growth over the long run. A cut in the corporate income-tax rate, which John McCain has proposed, coupled with meaningful middle-class tax relief would help businesses create jobs and let workers keep more of their paychecks.

Pelosi’s package would also include some traditional Democratic spending items: another extension of unemployment benefits, for starters. (The Democrats already enacted one extension by attaching it to a war supplemental in July.) In addition, the package would give money to states that have mismanaged their budgets, some of them deliberately. It is not uncommon for state governments to engage in politically popular spending they can’t afford and then pressure the federal government into bailing them out.

Pelosi is said to be coordinating with Barack Obama on the stimulus package, so it is likely to include some of his recent proposals as well. The most notable of these is a 90-day moratorium on foreclosures, which Obama was against when it was Hillary Clinton’s idea. The moratorium would only apply to banks that have received government assistance during the recent round of bailouts, which means pretty much all of them.

As with McCain’s misguided mortgage plan, it is hard to see how this plan makes sense. Some homeowners are hopelessly underwater and will lose their homes, even if that process is delayed for three months. Others are going to walk away regardless, because they no longer feel it is in their interest to make mortgage payments on houses with diminished values. For the rest — those who have fallen behind but could afford slightly lower mortgage payments — there is an adequate government program already in place called Hope for Homeowners. Like McCain, Obama is merely posturing.

Both candidates have proposed a smorgasbord of other initiatives. Obama wants to offer businesses $3,000 per new job created. McCain thinks the capital-gains tax should be lowered from 15 to 7.5 percent, but only temporarily. Both candidates agree that taxes on unemployment benefits should be suspended, and both have called for rule-changes pertaining to personal retirement accounts.

Some of these proposals have merit and some of them don’t, but none of them is going to have a major impact on economic growth. The key to recovery is going to be whether the president’s economic team can stabilize the banking system and unfreeze the credit markets. Anything else is playing around the margins.

The U.S. government just posted a record-breaking $455 billion deficit for fiscal year 2008, and 2009 isn’t looking any better. With the government taking on so many new liabilities, it is imperative that Congress and the new administration learn how to prioritize. The political calculus may call for spending $300 billion on ineffective stimulus, but the real math just doesn’t add up.


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