Time For A Stimulus Package

The following was posted on Mickey Hepner's blog on 1/21/2008. The original post can be read here. Mickey Hepner is an Associate Professor of Economics at the University of Central Oklahoma.

While every passing day seems to bring another disappointing economic report, this past week there was one bit of good news — our leaders appear willing to put aside petty partisanship and offer some needed help to America’s families.

During the past few weeks we have learned that real (inflation-adjusted) incomes are falling, unemployment is rising, the mortgage meltdown is continuing and the manufacturing sector is contracting. All the signs are pointing to a weakening U.S. economy — an economy that already may be in a recession.

That is why it was so pleasing to see this past week that President Bush and congressional leaders discussed the outline of an economic stimulus package, and pledged to cooperate to ensure its passage. While the details have yet to be finalized, it appears the final proposal will provide about $150 billion in temporary tax rebates and increased spending.

Some naysayers argue that $150 billion is too small to make a large impact on a $14 trillion U.S. economy. These critics are correct that even $150 billion is not enough to stave off a deep recession — it is unclear at the moment whether we will have a recession at all — but this is not the purpose of the stimulus. No stimulus the government can provide can cure all of the economy’s ills immediately. In fact, the stimulus is not intended to necessarily stop a recession, but to ease the burdens of one. In this way, an economic stimulus is just like taking a nasal decongestant whenever you have a cold. That decongestant does not cure the body from the cold, but simply makes the person feel better as their body fights the virus.

But some individuals in both parties have hinted they might oppose the stimulus proposal. For example, some Democrats are concerned about the effects of the stimulus on the national debt. It is true that the stimulus package will add $150 billion to the national debt next year. It is also true that doing so will help many American families weather these tough economic times. To me, the benefits of helping families survive a potential recession are greater than the cost of a $150 billion increase in the national debt.

On the other hand, some Republicans have threatened to oppose the stimulus unless it makes the Bush tax cuts permanent. But such a permanent solution to a temporary economic slowdown is costly. Instead of increasing the national debt by $150 billion as a temporary stimulus will do, permanently extending the Bush tax cuts would increase the national debt by $2.2 trillion during the next 10 years — more than 14 times the cost of the temporary proposal being discussed!

In order to educate policymakers about the benefits and costs of an economic stimulus, the nonpartisan Congressional Budget Office this week released an analysis of various stimulus proposals. They find that the most cost-effective ways to provide a short-term economic stimulus are:

Give a lump-sum rebate to households — more effective if targeted toward poor and middle-class families.

• Give a tax holiday for the payroll tax.

• Extend unemployment benefits.

• Increase food stamp funding.

Not surprisingly, the CBO finds that making the Bush tax cuts permanent is one of the least cost-effective ways to provide a short-term stimulus to the economy. As the report states, “changing the schedule of tax rates in 2011 and beyond is unlikely to have much effect on short-term demand in 2008.” And as mentioned above, permanently extending the Bush tax cuts is much more costly.

In the end, the most effective stimulus package will be one that is temporary (to keep down the long-run costs) and targeted to those families most likely to spend the money. Each of the four proposals listed by the CBO meet this standard. As a result, let us hope that they are the centerpiece of the final stimulus plan.

© 2008 Mickey Hepner

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