Economics

The High Price of Pretense

Bogus politics of the stimulus

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Washington, D.C. is a place where delusions go to thrive. That explains why Congress and the president are now agreed on remedies that will not work, expending money they do not have, to fix a problem that may not exist.

The alleged problem is a recession. From the sounds of panic, you would assume we are already in a deep downturn. In fact, that does not appear to be the case, and many economists doubt we will have a recession (defined as two consecutive quarters in which total economic activity declines) at all.

The Congressional Budget Office, for example, predicts the economy will grow by 1.7 percent this year. A couple of weeks ago, The Wall Street Journal surveyed 54 economic forecasters, who on average put the chance of a recession at 42 percent and expected growth to approach 2 percent in the first half of this year.

Steven Wieting, an economist at Citigroup, predicts growth of 1.2 percent. But like our elected officials, he sees no point in getting hung up on technicalities. "Academic definitions aside, we'll call that a recession," he writes in a new report. We can call it a recession or we can call it a wirehair terrier, but that won't change what it actually is: an expansion, albeit a modest one.

Notwithstanding that, President Bush and House leaders have agreed to pelt the economy with $150 billion in rebates and business tax incentives to rouse it from its lethargy. The idea behind the rebates is that consumers will use the cash to buy goods and services, keeping companies and workers busy supplying them. Business tax incentives are supposed to goose investment in plants and machinery. The two sides are agreed, in the mantra of the week, that these measures will be "timely, temporary and targeted."

In their dreams. Timeliness, in this case, is not unlikely—it's impossible. The Internal Revenue Service, it seems, is fully occupied at the moment sending out tax forms and processing returns, and will be for a while. So even if the program zips through the Senate, the checks probably won't go out until June and won't all reach the beneficiaries until August. The money itself will take months to be spent, if it gets spent at all—postponing the intended boost until next football season.

If a recession is already underway today, it could very well be over by then. This is the equivalent of a doctor telling a patient that she may have pneumonia and promising to put her on antibiotics—in October.

Targeted? Sure, if you define the target as the broad side of a barn. The Treasury checks would go to 117 million families, or three out of every four families in America. Couples with incomes all the way up to $174,000 would be included.

The business provisions, which let companies write off investments faster than usual, are equally indiscriminate. The purpose is to spur purchases that otherwise wouldn't be made. But as Brookings Institution economist Douglas Elmendorf told me, the break will apply to other investments as well.

"It's safe to say that more than 90 percent of the lost business tax revenue will simply subsidize investment that would have occurred anyway," he says. Even by Washington standards, a bill that squanders nine out of every 10 dollars is not a model of efficiency.

Temporary? The rebates and business breaks may vanish like leaves in autumn, but the fiscal consequences will endure. This year's federal budget deficit was already expected to hit $250 billion, according to the CBO, and the stimulus would pile on another $150 billion. So taxpayers, current and future, will have to shoulder more each year to finance the federal debt—interest on which already swallows up 10 percent of federal revenues.

So, contrary to its billing, the package is likely to be tardy and scattershot, with a lingering, bitter aftertaste. Even if it could be implemented perfectly, though, it might still be a futile endeavor. Alan Auerbach, an economist at the University of California, Berkeley, looked at past fiscal policy initiatives and found "little evidence that these effects have provided a significant contribution to economic stabilization, if in fact they have worked in the right direction at all."

In other words, we may spend a lot of money to accomplish nothing. Note to our leaders: We can do that for free.

COPYRIGHT 2008 CREATORS SYNDICATE, INC.

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  1. Strong – and v unusual – call from the head of the IMF for a fiscal relaxation on the front page of the FT today.

  2. “Even by Washington standards, a bill that squanders nine out of every 10 dollars is not a model of efficiency.”

    Actually, a bill that squanders 10 dollars out of every 10 is pretty much SOP. And then there are bills like the ethanol subsidy that squander 10 out of 10 and do additional economic damage. Talk about a twofer!

  3. Everyone should call their congressman and tell them to fight against the sti….

    what? Oh, I’m sorry. I was laughing too hard to finish that thought.

  4. “Hey buddy- I’ll give ya a hunnert bucks if you vote for me!”

  5. On the question of timeliness — we’re not six months away from the August subprime tumble, so as Chapman points out, we haven’t had time for two consecutive quarters of negative growth. A stimulus package now, even if it doesn’t take effect for a few months, could nip a recession in the bud.

    Even Ben Bernanke , a constrained discretion guy if there ever was one, recommends monetary and fiscal expansion.

  6. i would say Ben Bernanke may be biased.

  7. “Academic definitions aside, we’ll call that a recession,” he writes in a new report.

    In other words, where’s my bailout $$$?

  8. They are not really throwing it down the garbage disposal, they are just shuffling it around. There is no such thing as government stimulus. That money has to come from somewhere either from debt or taxes or devalueing the currency by printing money. The government may print its own money but it doesn’t print its own wealth. If you want to actually “stimulate” the economy, the government ought to cut spending rather than increase it. If it cuts spending that means that it taxes or borrows less and more money is available for the private sector. How about this idea, if there is a recession on why not stop taking 18 cents of every dollar people earn?

  9. A stimulus package now, even if it doesn’t take effect for a few months, could nip a recession in the bud.

    Trying to prevent inevitable things, like recessions, is what got us here in the first place. Markets need corrections and mild recessions are better for the long term.

    But fuck that, let’s kick the can down the road, sink the dollar, and fork over a bunch of new subsidies so that Bush doesn’t have to deal with it in his last term.

    I mean, the guy’s going to need all year to end the Israeli=Palestinian conflict, right? [/sarcasm]

  10. I want my goddamned $600. Everything else is money that will be wasted anyway, and I’d rather it be spent by the private sector on investment than by the government on pork.

  11. or we can stop the war and save the money there.. not up for that john?

  12. “or we can stop the war and save the money there.. not up for that john?”

    I will do you one better, why don’t we just eliminate DOD all together. We can send Ron Paul out on a peace mission to trade and explain the value of the gold standard to the entire world. That and completely open borders that allow anyone and anything to enter the country should give us world peace and save 500 or so billion a year.

  13. The Treasury checks would go to 117 million families, or three out of every four families in America.

    156 million families? In other words, the average family has less than 2.0 people?

    Per this (pdf) there are about 110-115 million households in the US. Per this blurb there were about 130 million individual tax returns filed in 2003.

    Hell, I don’t particularly care for this plan, but when talking of innumeracy it’s best not to make mistakes yourself.

  14. Right now the economy has a nasty hangover from 7 years of binge drinking. The solution to a hangover is not to take a shot of whisky or shoot up some heroine. Instead, it should be allowed to lie down and let it pass.

  15. Even if the whole “stimulus” idea is voodoo, it’s strange to see libertarians so outraged by the prospect of the federal government giving money back to taxpayers. What’s the problem? How does this count as “tossing money down the garbage disposal”?

  16. Daze –
    It’s not money that currently exists. Its not like they’re cutting spending by $150 Billion and giving it back to the people they took it from. They’re spending an ADDITIONAL $150 Billion dollars to give us the money. Kinda like the difference between you saving up to buy your kids a bike and borrowing money in their name to buy them a bike.

  17. Even if the whole “stimulus” idea is voodoo, it’s strange to see libertarians so outraged by the prospect of the federal government giving money back to taxpayers. What’s the problem? How does this count as “tossing money down the garbage disposal”?

    I’m looking at this bread-and-circus from the motivation behind it. While giving money back is good, it’s just a band-aid to keep Bush’s economic record clean.

    The outrage, for me at least, is that it’s not enough, and that no one’s talking about any real long term solutions…

  18. The stimulus package is redistributive in the worst way – making payments to those who never paid income tax in the first place, financed with the deficit.

    The entitlement state spending spree mindset is responsible for a large part of that deficit, and throwing money at the current market crisis using that same logic can only make things worse in the long term.

  19. Taktix:
    You’re arguing that government can’t do much to prevent normal business cycle fluctuations, and shouldn’t try. Maybe that’s so, though there are arguments in the other direction having to do with wage stickiness — I don’t know enough to make a judgment there.

    But I’m not sure this particular downturn is a normal fluctuation. To the extent that it was due to subprime lending, it seems that we’re looking at the consequences of finding out that some financial tools are riskier than people believed. In other words, it’s a one-off event. So maybe a stimulus package now is less likely to create inflationary expectations than it would ordinarily.

  20. I pay quarterly taxes. When I get my stimulus check, I’m just going to send the money right back to the US Treasury anyway.

  21. “it’s strange to see libertarians so outraged by the prospect of the federal government giving money back to taxpayers.”

    The problem is that the size of one’s “rebate” check is inversely correlated with the amount of taxes paid.

    A real, honest, across-the-board tax cut would be preferable (matched with spending cuts, of course)… but we all know that will never, ever happen.

  22. I think we’ll soon discover that the “rebate” maneuver’s actual effects will be counter to the stated goal. It’s spending, not taxes, that ails us. Further debasing the dollar by handing out bunches of them isn’t going to get us anyplace we want to be.

  23. Reason is complaining about an tax decrease (albeit a temporary one)? Not very libertarian of you, methinks.

  24. Reason is complaining about an tax decrease (albeit a temporary one)? Not very libertarian of you, methinks.

    This is not a “tax cut”, anymore than buying things you can’t afford on your credit cards is “getting stuff for free”.

    Because the government is in debt and can’t afford to give us $600, that $600 you get now means that you will have to pay $600+interest in taxes at some future date to make up for it. Think of that $600 as a loan from your friends in China, not as a tax-cut.

  25. …” it’s strange to see libertarians so outraged by the prospect of the federal government giving money back to taxpayers. What’s the problem?…”

    The problem is, this money is neither a gift, nor a rebate, it is money which will count against the next tax year. It is an advance on the money you will pay in taxes next year.

    This advance will not be accompanied by a cut in government growth or tax rates, so I see it as money which must be spent on outstanding debts and not a new HDTV.

  26. Really, $600? Come on. What will that really pay other than an extra month’s rent or get ahead on a credit card payment? Don’t get me wrong, I’ll use it, but I wish that GWB et al would stop acting like it is a “King’s Ransom”.

    /I wonder what GWB will spend his $600 on?

    /Oh, I forgot, he makes so much bank he doesn’t need it.

    /IOW. it is chump change to him.

  27. To borrow and tweak a phrase from our freinds in law enforcement.

    GWB & Co are shitting on us with $600 of our own money and they have the gall to call it ice cream.

  28. In other words, we may spend a lot of money to accomplish nothing.

    Let’s see. The checks arrive in August and will be spent in the few months after. What was it that was happening those few months later? Something about voting?

    Sounds like laser targetting to me.

  29. it’s strange to see libertarians so outraged by the prospect of the federal government giving money back to taxpayers.

    It would be strange to see that, but I don’t think that’s what you’re seeing.

    The current “rebate” plan is part redistribution (which libertarians hate) since it doesn’t rebate proportionally to income taxes paid.

    Since the rebate is made out of borrowed money, the taxpayers are just going to have to pay it back later anyway, with interest.

  30. we have 4 head o’ kid

    cha ching!

  31. “Let’s see. The checks arrive in August and will be spent in the few months after. What was it that was happening those few months later? Something about voting?

    Sounds like laser targetting to me.”

    If GWB was really serious about doing all of us a “solid” and being revolutionary, he would say,

    “You know, 2007 was a bad year and it was my fault, so you know what I’m gonna do? I’m the decider and the uniter so I’m gonna call 2007 a mulligan and declare 2007 a “tax free” year.

    /Not gonna happen

  32. Life imitates futurama again:

    Bender: What to do? What to do? Should I get one $300 hooker bot, or 300 $1 hooker bots?

  33. I wonder, if we cut the Department of Education and the BATFE, could we all get 300 bucks every year?

  34. This is $600 that they’re giving back after they took it. Or giving before they take it, just depends on where you say it come from. It’s hardly a tax cut or free cash.

    When I heard about this plan I doubled over in laughter. My next thought was how much it’d cost to administer this. I mean tax collection and enforcement, the bureaucracy, and then disseminating that money isn’t cheap after all. Nor are interest payments.

    There’s hardly a better libertarian argument than this for fiscal mispolicy in the US. God forbid there actually is a recession later on, who knows what shenanegins they’d get up to. Hospital taxes to finance medicare to pay to give money back after they took it ? Oh..

  35. I love how all those politicians and reporters’re willing to pretend that this is a temporary easing of taxes and that as such it will help the economy. If those were true (and neither is), why wouldn’t it be good to just lower taxes permanently?

  36. “I love how all those politicians and reporters’re willing to pretend that this is a temporary easing of taxes and that as such it will help the economy. If those were true (and neither is), why wouldn’t it be good to just lower taxes permanently?”

    Or just raise the standard deduction to keep up the inflation they cause. The income level of required contributions to FICA and Medicare have kept up with inflation, why does the standard deduction lag behind?

  37. “to keep up the”

    to keep up WITH the…

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