Posted on Wednesday 30 January 2008

The House, seizing a rare moment of bipartisanship to respond to the economy’s slump, overwhelmingly passed a $146 billion aid package Tuesday that would speed rebates of $600-$1,200 to most taxpayers. The plan, approved 385-35 after little debate, would send at least some rebate to anyone with at least $3,000 in income, with more going to families with children and less going to wealthier taxpayers.

It faced a murky future in the Senate, though, where Democrats and Republicans backed a larger package that adds billions of dollars for senior citizens and the unemployed, and shrinks the rebate to $500 for individuals and $1,000 for couples. That plan, written by Finance Committee Chairman Max Baucus, would deliver checks even to the richest taxpayers, who are disqualified under the House-passed measure. Both versions would provide tax breaks to businesses to spur equipment and other purchases…
Says Princton Economics Professor and New York Times op-ed columnist, Paul Krugman:

House Democrats and the White House have reached an agreement on an economic stimulus plan. Unfortunately, the plan — which essentially consists of nothing but tax cuts and gives most of those tax cuts to people in fairly good financial shape — looks like a lemon. Specifically, the Democrats appear to have buckled in the face of the Bush administration’s ideological rigidity, dropping demands for provisions that would have helped those most in need. And those happen to be the same provisions that might actually have made the stimulus plan effective. Those are harsh words, so let me explain what’s going on.

Aside from business tax breaks — which are an unhappy story for another column — the plan gives each worker making less than $75,000 a $300 check, plus additional amounts to people who make enough to pay substantial sums in income tax. This ensures that the bulk of the money would go to people who are doing OK financially — which misses the whole point. The goal of a stimulus plan should be to support overall spending, so as to avert or limit the depth of a recession. If the money that the government lays out doesn’t get spent — if it just gets added to people’s bank accounts or used to pay off debts — the plan will have failed.

And sending checks to people in good financial shape does little or nothing to increase overall spending. People who have good incomes, good credit and secure employment make spending decisions based on their long-term earning power rather than the size of their latest paycheck. Give such people a few hundred extra dollars and they’ll just put it in the bank. On the other hand, money delivered to people who aren’t in good financial shape — who are short on cash and living check to check — does double duty: It alleviates hardship and also pumps up consumer spending.

That’s why many of the stimulus proposals we were hearing just a few days ago focused in the first place on expanding programs that specifically help people who have fallen on hard times, especially unemployment insurance and food stamps. And these were the stimulus ideas that received the highest grades in a recent analysis by the nonpartisan Congressional Budget Office…
I don’t get it. Economics is beyond my grasp, but even Krugman sounds like a pop phychologist to me. I agree with his comments about the Bush administration’s ideological rigidity. But the psychobabble about avoiding a Recession by giving away money hoping that people will spend it eludes me. I can’t get beyond this logic:
  • The U.S. Government is throwing away money in a pointless war in Iraq.
  • The U.S. Government is giving away money to [maybe avoid] Recession.
  • The National Debt is soaring as Bush tries to make tax cuts permanent.
So they’re cutting interest rates like crazy and giving away money in the hopes of putting a bandaid on the economy [so it will collapse when the Democrats regain power in 10 months].
  • The U.S. Government is not spending money helping people who need it.
This isn’t government. It’s bad theater…

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