THE US economy is acting naughty.In the last three months of 2007,it grew an anemic 0.6 percent according to figures released last week. Congressional Democrats, Congressional Republicans, and the White House know just what to do: They've got a big stimulus package raring to go. They just can't agree on the best way to stick it in.
The basic idea is to give everyone a nice, juicy tax rebate, i.e. free money. Then politicians get down on their knees and hope people spend it, not save it or use it to pay down debt. Fed Chairman Ben Bernanke, Clinton Treasury Secretary Larry Summers and current Treasury Secretary Hank Paulson have all backed the plan. So no matter which party the economic experts get their kicks from, they want this stimulus package badly.
As Robert Novak famously quipped, "God put Republicans on this earth to cut taxes." Surprise, surprise: They want tax cuts for the rich. The problem is that's bad policy because rich Americans save their money. (What would they spend $1000 more on anyway?) Tax cuts for the rich can improve long-term growth, since their increased savings gets invested. Those tax cuts could even, paradoxically, increase government revenue by decreasing tax evasion, if marginal tax rates are high enough (which they're not).
But like a drunken one-night stand, the goal is short-term kicks. In this case, the Democrats have gotten it completely right by phasing out the rebate starting with couples who earn $150,000 a year. Poor and middle-class Americans will spend most, if not all, of their rebates, thereby actually stimulating the economy. And the people they buy stuff from will go on to spend their increased earning. Like Keynes said, multiply your pleasures and that one-night stand will last until morning.
The Democrats have gotten the Republicans off their irresponsible addiction to supply-side tax cuts. But they've let their majority status in the Senate go to their heads. Despite a completely negotiated House plan, Sen. Max Baucus (D-Mont.) unveiled his own plan last Tuesday. It looks like the chairman of Senate tax panel is more drunk off power than Lindsay Lohan in a Mercedes.
Baucus is insisting on upping unemployment insurance benefits. He wants to give Americans months more of free money before requiring that they get jobs. Sure it sounds nice on CNN, but it's actually terrible policy. All Baucus' plan does is give a slight short-term boost at the expense of big medium-term pain. The more generous the unemployment benefits, they longer people can wait before they have to find a job. They're also not going to increase their spending because, well, they're unemployed and know they need to ration it. By advocating spending $10 billion on more unemployment benefits, the Democrats are acting as fiscally prudent as MC Hammer.
The White House, meanwhile, is sticking to Calvin Coolidge's maxim that "the business of America is business." President Bush has pushed for more lax rules for tax write-offs to create incentives for capital investment. Both leading Republican presidential candidates have proposed a much better, and simpler, idea: Cut the capital gains tax. If the government wants U.S. firms to invest more in their own capital, just tax it less.
While the White House and Congress are ready to get down, the Fed is busy standing awkwardly in the corner. With two huge rate cuts in two weeks, money is even easier than Paris Hilton. The last time I checked, the Fed's job was to manage inflation expectations, not give it up every time the stock market talks dirty. The U.S. economy has a long, hard road to a return to growth (That's what she said). If the Fed does its job and lets Congress do its job, the stimulus package might just have a happy ending.
Josh Levy's columns appear Mondays in The Cavalier Daily. He can be reached at jlevy@cavalierdaily.com.
Read More
EDITORIAL: Carla Williams deserves her seat at the table
By Editorial Board | YesterdayLooking beyond basketball and football reveals that Virginia Athletics is, in many ways, thriving.
UPADHYAYA: The Great and not-so-Good sides of U.Va.’s 2030 housing plan
By Apal Upadhyaya | 4 days agoInstead of improving the dire state of existing infrastructure, however, the University has shifted attention away from it and chosen to expand.
EDITORIAL: Support low-barrier shelters in Charlottesville
By Editorial Board | 5 days agoInvesting in low-barrier shelters now will pay off in increased stability for the homeless, which will undoubtedly improve the safety of shelters and the community writ large.
