January 15 , 2003
About a year ago, I stated that neither the Democrats nor
Republicans seemed to know what an economic stimulus package was.
There definitely has been some learning in the past year.
My three principles of an economic stimulus program is
that a) it is timely (immediacy), b) it addresses problems that are preventing
the natural curative powers of a market economy from restoring high
non-inflationary growth (appropriateness), and c) it goes away when the
impediment to growth is dissolved (fleetingness).
The Democrats propose a $137 billion transfer of
purchasing power from bond investors (from whence do you think the purchasing
power is coming) to mostly low and middle income households. The program is immediate and fleeting, but is it appropriate?
The Democrats argue that consumer spending shortfalls are
holding back the recovery. By
pumping purchasing power into households that may be spending everything they
earn, bond investors are relinquishing their savings to spenders.
In a weak economy, this spending more than compensates for any minor
offsets from reduced savings flows available for capital formation.
As some economists argue, the Democrat program stimulates
demand, which clearly is deficient.
However, demand deficiency is not from the household
sector. Instead, corporate
wariness and diminished business credit quality are restraining corporate
spending. Reduced use of capital
also is a problem, but the larger one is the absence of any capacity growth.
Even in severe recessions following the Depression, some capacity
expansion normally occurred.
Much of President George W. Bush's proposal is not
immediate. Furthermore, permanent
changes in the tax treatment of dividends do not go away.
However, the President has learned enough not to call his program a
stimulus package. He recognizes
that long term growth is part of his tax cutting goals.
At least he has not made the error of past Presidents to
cloak tax reform in a stimulus package that is of similar size to the
opposition. Instead, he proposes
$102 billion of immediate tax incentives in a program that balloons to $674
billion of reduced tax receipts in the absence of higher growth during the
next ten years.
Let us put aside the $20 billion reduced tax liability in
2003 as a result of the dividend changes and $364 billion in lowered receipts
from dividend income over the next ten years.
Are the remaining changes addressing appropriate problems?
Bush is asking to move the 2004 and 2006 tax cuts forward
to 2003. I have extolled at
length my aversion to multi-year tax cuts.
Incentives delayed do not change behavior. By finishing the marginal tax reductions early, the power of
those incentives can be realized much sooner.
This certainly is appropriate.
Similar arguments can be made for accelerating the
"marriage penalty" adjustment and the enhanced child credit.
As they already are law, but not yet enabled, bringing them forward
only increases deficits from what current law would generate for a few years.
In neither case am I arguing that these tax changes are
what I would propose. I am merely
stating that they are law but delayed and should be used now, when they cost
the least to finance.
Bush has some income distribution changes in his
proposals to widen the 10 percent tax bracket and raise the threshold for
application of the alternative minimum tax.
Apparently, he maintains that government should address the purchasing
power of low and middle income tax payers, not refundable credit receivers.
There are fairness issues associated with how the two
parties treat low income households. However,
welfare reform became popular because most people thought a hand up was more
American than a hand out.
Bush addresses the credit squeeze facing small business
by increasing the expensing of equipment to $75,000. The reduced tax liability will not help corporate liquidity
for a year, but it does address another impediment to recovery.
Finally, President Bush has proposed an innovative
re-employment process that will encourage job search and retraining for
qualified unemployed people. By
providing a grant to be used however the unemployed person deems appropriate
while job search occurs, the program increases the efforts of that search.
This should reduce incentives to delay job search and retraining until
unemployment benefits are exhausted.
The White House provided no estimates of revenue loss for
retroactively extending unemployment benefits, as that program will be paid
out of accumulated benefit pools (or in some states from the borrowing of the
Federal treasury). However,
virtually everyone in Washington believes those benefits will be extended.
I also have addressed that issue in previous columns and
believe that when unemployment rates rise above "normal", increased
benefits should be automatic. After
all, when many are unemployed, job search is more difficult than when only
normal job changes occur.
My next column will address that tax change on dividends, which is 54 percent of the total revenue change caused by the Bush proposals over the next ten years if growth is not altered. Though flawed, the Democrats have proposed a stimulus program while the President knows he has not.