Statement By Robert Greenstein Executive Director In Response to Administartion Comments on Economic Stimulus
In outlining its principles for economic stimulus today, the Administration helpfully called for measures that would be temporary and would take effect right away. At the same time, however, the Administration also included several principles that would substantially reduce the effectiveness of a stimulus package. First, the Administration would apparently provide either no tax rebate or only a partial one to more than 65 million low- and moderate-income households, including about 22 million households which do not file income tax returns, such as many seniors on fixed incomes. Second, the President disparaged the idea of including spending measures in a stimulus package even though they can be among the most effective stimulus options available.
Treasury Secretary Paulson said today the tax rebate should go only to people who pay taxes, which could mean the Administration would limit it to those who pay income taxes and exclude those who don’t earn enough to owe income tax but pay payroll taxes. The Administration’s plan that was disclosed yesterday would do just that. It also would give only a partial rebate to millions of taxpayers who are in the 10 percent tax bracket because their incomes are modest. Families of four with incomes below $41,000 would get nothing or only a partial rebate. These are, however, the very consumers who would spend most of the rebate rather than save it. Federal Reserve Chair Ben Bernanke yesterday noted the importance of covering low- and moderate-income households for this reason.
The President today spoke of using the tax rebate to enable Americans “to help meet their monthly utility bills, cover higher costs at the gas pump, or pay for other basic necessities.” Yet the Americans who most need help meeting those expenses, and would quickly spend all or most of the rebate, would be fully or partially left out of the Administration’s plan.
The Administration’s assumption that tax cuts are inherently more stimulative than spending measures does not withstand scrutiny. Both spending measures and tax cuts can be effective — or ineffective — as stimulus depending on their nature and design. As Nobel laureate Joseph Stiglitz and now-CBO director Peter Orszag have written, “Basic economic analysis indicates that increased government expenditures can indeed be stimulative, and, in fact, are often more effective as stimulus measures than tax cuts.” In addition, a new CBO report of January 15 finds the two measures that would have the highest bang-for-the-buck and be the quickest acting are two spending measures: temporary increases in unemployment insurance and food stamp benefits.
Although the Administration calls for substantial tax cuts for business investment, studies found that such measures had modest effects, at best, in the last recession. Whatever their merits, most such measures would drive state budgets deeper into deficit; due to the linkage between federal and state tax codes, they would cause the majority of states to lose tax revenue. Since states must balance their budgets even in recessions, states would have to impose even deeper budget cuts or larger tax increases than would otherwise be needed to bring their budgets back into balance. Yet state budget cuts and tax increases during recessions withdraw demand from the economy, weakening it further. That’s the last thing that the federal government should do. (In fact, to address this problem in the last downturn, Congress and the President provided $20 billion in state fiscal relief, which can be an effective stimulus measure.) Unfortunately, that is the direction in which the Administration’s principles point, since they omit state fiscal relief while calling for measures that would result in larger state deficits.