Debating Stimulus


Published January 25, 2008, issue of January 25, 2008.
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The president and the congressional leaders appeared last week to have agreed in principle on a stimulus package of some $150 billion, or about 1% of the Gross Domestic Product, which should be enough to get a lot of people back to work. The two parties agree in broad terms on a package combining tax rebates, to get consumers buying again, with cash infusions aimed at specialized targets. That’s the good news.

The bad news is that the two sides are likely to collide over the critical question of who should get the money. The president wants to give an across-the-board tax rebate to anyone who paid taxes last year, rich or poor. He also wants to cut taxes on investments and capital gains — a perennial conservative favorite in good times and bad — in order to promote new investment and new jobs.

The Democrats favor a tax rebate for the poor and middle class, including those too poor to pay taxes, but not for the rich. In effect, they want to give spending money to those who don’t have it, not to those who do. Additionally, they want to increase food stamps and extend unemployment benefits beyond the current 26 weeks. They argue that targeting the lower income brackets will get the money circulating faster, since the poor, living closer to the edge, will rush out with their checks to buy the things they couldn’t afford last week.

In simpler terms, the two emergency plans actually amount to Washington business as usual: Bush would help the rich and the Democrats would help the poor.

The White House opposes the Democratic rebate plan in principle, because it argues that you can’t give a tax rebate back to someone who didn’t pay taxes in the first place. As for the Democrats’ other social spending, the president says the stimulus should go only to programs that will impact the economy directly.

The Democrats counter that giving money to working people will stimulate the economy more than giving to the rich. Those who have less to begin with will be quicker to run out with their new cash and buy things, which is the best way to boost demand and get the wheels turning.

As it happens, the Democrats have the facts on their side. A new study by Moody’s, the Wall Street rating firm, looked at past slowdowns and found that stimulus spending aimed at the poor actually gives more of an economic boost than aid to business and the affluent. As reported in the Associated Press, the study found that every stimulus dollar channeled to the poor — through extended unemployment, low-income tax breaks, subsidizing state programs and more — resulted in consumer spending increases of as much as $1.73. By contrast, each dollar directed to business tax breaks, high income rebates and the like resulted in less than a dollar of increased economic activity. If the president wants to target the direct consequences of economic slowdown, there’s no better place to begin.

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