President Bush and Senator Daschle both are stumping for
variations of a tax stimulus package as Congress comes back to work.
There is only one problem. Neither
has any idea what a tax stimulus package should be.
The idea of a budgetary stimulus to jumpstart a faltering economy has been
endorsed by economists at least since Keynes and maybe even Ricardo or Corbert.
The Keynesian version of the argument is simple. When private spending
falters and people and machinery are unemployed, a push should be made by the
public coffers to reverse any downward spiral and push the economy back toward
sound levels of activity.
You do not continue to push after the economy has found its own momentum. Moreover,
you are overcoming resistance, such as inadequate spending capacity, liquidity
shortfalls, or profit collapses.
Stimulus packages are not reform legislation that eliminates long term
restraints or solves persistent social problems.
They also are not spending or tax reduction programs that are permanent.
The reason why the Keynesian version should work is that any borrowing
needed by the government to fund the spending and/or tax cutting initiatives
will have minimal impact upon interest rates during recession.
I have argued forcefully that
interest rates do rise with government borrowing during sustained expansions.
Thus, the keys to a stimulus package are that it is timely (we don't solve the
problem well after it already is resolved), temporary, and offsetting private
The House version of the stimulus package includes the elimination of the
corporate alternative minimum tax, changing depreciation schedules, lowered
capital gains taxes, and acceleration of some tax cuts already enacted but not
The corporate alternative minimum tax may be creating long term distortions,
especially as its provisions are not adjusted for inflation.
(The same problem exists with the personal AMT).
This is a problem that belongs in a reform bill, not a stimulus bill.
A reform bill also should contain the depreciation schedule changes.
However, the correct measure for a stimulus package, a temporary
investment tax credit for incremental spending, has been so abused politically
that it apparently can no longer be discussed in the halls of Congress.
Therefore, I would reluctantly accept the depreciation changes as a second best
solution to entice corporations to build up their capital spending programs.
Capital gains tax reductions increase stock transactions in the short run and
only add to investment holdings over time. This
is exactly what should not be in a stimulus package.
Democrats must get off their high horse about rich corporations (do they include
those going bankrupt) and recognize that capital spending shortfalls are
contributing to economic weakness. You
prop up the part of the mine shaft that is falling.
Accelerating tax cuts only increases the government deficit in the short run.
As those cuts would have occurred anyway a few years later, this pushes
the stimulus to where it could be more effective.
Indeed, if economic activity responds, government borrowing may actually
be lower than originally projected when the originally scheduled time for the
tax cuts comes around.
Therefore, such accelerations of the omnibus tax provisions makes good economic
sense in a stimulus package.
As a rule, spending programs do not work well in a stimulus program because the
contract and spending cycle usually delays the economic impact until recovery is
underway. Furthermore, the haste of
the spending usually leads to less desirable projects, as Japan has discovered
in its many attempts to use construction spending to jumpstart their economy.
Studies show that the stimulus package passed during the Carter administration
actually had its greatest impact when inflation, not recession, had become the
problem. The Carter program added to
economic instability when it was supposed to do the opposite.
Those education construction programs pushed by the Senate belong in education
appropriations, not economic stimulus. On
the other hand, the extension of unemployment benefits not only has precedent,
but is appropriate.
Recessions make job search less fruitful (though search definitely must be
done). Therefore, lost purchasing
power exists longer than when jobs are lost in a normal expansion.
Adding weeks of eligibility should be encouraged.
Indeed, a law that would automatically do this when claims rise above
recessionary levels (currently about 400,000 per week) and remove the special
provisions when claims fall to 350,000 per week on a four week average could
provide automatic adjustments.
Unfortunately, the Senate tried to add provisions about medical insurance to
their package. Protecting medical
insurance for unemployed workers is laudable, but should not emerge in a
stimulus package. Again, this is new
law and should be in some reform measure.
Ultimately, the whole stimulus issue was stalled on how to purchase the medical
insurance for the unemployed. Should
it be the employer's program (who needed to lower costs by shedding workers) or
credits for open market insurance purchases?
This is not a stimulus provision.
Because there are glimmers of improving economic activity, I would scrap the
entire stimulus program as being too late to aid economic stability.
If politics dictates that one is passed, then it should contain only
extended unemployment, some depreciation schedule changes, and some acceleration
of the already enacted but not yet effective tax cuts.
Put the health insurance, AMT, and other issues into reform legislation and see
if that is what the public wants. I
am ready to teach my course on stimulus legislation whenever the Congress and
President are ready to listen.