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.


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