Economic Stimulus

I think I've blogged before about my preference for a term like "economic recovery" rather than the more technocratic-sounding "economic stimulus." A new message memo from pollsters Hart and Associations suggests recovery is also more resonant with the public than stimulus:

The survey results indicate that voters do not respond well to “stimulus” as an economic priority, while “economic recovery” does resonate.

The latest from Kuttner on how Dems and allies mis-messaged the stimulus:

In addition, the Democrats were (and still are) hobbled by the fiscal conservatives in their own ranks. In the negotiations with Speaker Nancy Pelosi, the House Blue Dog Caucus insisted that the overall size of the stimulus be held down. The Clintonian idea that the Democrats should first and foremost be the parsimony party still has substantial support. The Democrats actually entered the negotiations proposing a smaller stimulus number than the administration.

The Democrats also bought the centrist mantra, repeated endlessly by a chorus that included former Treasury Secretary Larry Summers, the Center on Budget and Policy Priorities, and countless others, that the stimulus should be "timely, targeted, and temporary." Why this tepid trilogy of weak T's? Democrats were fearful that the economic downturn, absent these caveats, would become an excuse for another round of permanent Republican tax cuts. So instead of looking toward the fall election and the real economic plight of the electorate, they kept looking over their shoulders at the Republicans.

The conventional wisdom among centrist economists is that stimulus bills are very risky. By the time they get through Congress, the recession is often over (hence, timely); Congress is tempted to turn them into Christmas-tree, special-interest bills (hence, targeted); and tax cuts, once enacted, tend to become permanent holes in the tax code (hence, temporary). This wisdom is accurate as far as it goes, but in a structural economic crisis, it doesn't go very far. So instead of coming out of the box with a recovery program that offered at least a down payment on reversing 30 years of economic insecurity, and beginning a serious effort to repair the financial crisis, Democrats yet again were enablers of President Bush.

They were rewarded with a photo op beside a hugely unpopular and failed president bringing Democrats to heel. In the larger context of the general election, Timely, Targeted, and Temporary signaled nothing so much as Think Small.

Robert Reich's op-ed in the Times today is a good read. He elaborates on his "it's the inequality, stupid" message:

WE’RE sliding into recession, or worse, and Washington is turning to the normal remedies for economic downturns. But the normal remedies are not likely to work this time, because this isn’t a normal downturn.

The problem lies deeper. It is the culmination of three decades during which American consumers have spent beyond their means. That era is now coming to an end. Consumers have run out of ways to keep the spending binge going.

The only lasting remedy, other than for Americans to accept a lower standard of living and for businesses to adjust to a smaller economy, is to give middle- and lower-income Americans more buying power — and not just temporarily.

Much of the current debate is irrelevant. Even with more tax breaks for business like accelerated depreciation, companies won’t invest in more factories or equipment when demand is dropping for products and services across the board, as it is now. And temporary fixes like a stimulus package that would give households a one-time cash infusion won’t get consumers back to the malls, because consumers know the assistance is temporary. The problems most consumers face are permanent, so they are likely to pocket the extra money instead of spending it.

The subtext here is the Brookings/Hamilton Project's "temporary, timely, and targeted" constraint, their influential proposal for how to design the stimulus package. Reich is arguing that the "temporary" condition prevents policymakers from addressing the issues behind the downturn. So not only are these constraints bad strategy- they're bad policy.

According to a new AP-Ipsos poll, the people have a clear favorite when it comes to economic stimulus:

The heck with Congress' big stimulus bill. The way to get the country out of recession — and most people think we're in one — is to get the country out of Iraq, according to an Associated Press-Ipsos poll.

Pulling out of the war ranked first among proposed remedies in the survey, followed by spending more on domestic programs, cutting taxes and, at the bottom end, giving rebates to poor people in hopes they'll spend the economy into recovery.

From the topline results, the percentages of those responding that particular policies would help fix the country's economic problems "a great deal":

Cutting taxes: 36%
Putting more money into the hands of poor people: 29%
Increasing spending on domestic programs, like health care, education, and housing: 43%
Pulling out of Iraq: 48%

As far as I know, this is the first poll to include pulling out of Iraq in an economic context. See this compilation for more polling on recession prevention packages.

While the current downturn hasn't been caused by the Iraq War, the increase in military spending during the Bush presidency has had, and will continue to have, considerable economic costs for the United States, as Dean Baker has documented. Even if they won't prevent a recession, leaving Iraq and reducing military spending would strengthen the economy, in large part by freeing up funds for domestic investments.

One of the notable things about today's neo-Malthusian balanced-budgetism—see here for a typical inside the beltway variety—is that it studiously avoids calling for controls on military spending. Warren Rudman, moderate conservative though he may be in today's times, is no Ike Eisenhower.

PS: Thanks to John Schmitt for bringing the AP-Ipsos poll to my attention.

Sorry for that title, but I just had to use it before Barbara Enrenreich did.

I actually have nothing more to say about the anti-recession package passed by Congress yesterday, but will recommend the following:

• Dean Baker's TPM Cafe post on the package
• a polemic by David Michael Green.

And, for wonks: the Joint Tax Committee's mucho technical analysis of the legislation.

Finally, the Tax Policy Center has posted their preliminary analysis of the distributional effects of the individual benefit provisions in the bill. The big winners: families in the fourth quintile, 98.3 percent of whom receive an average benefit of almost $1000. Overall, 87 percent of households receive an average benefit of $714. Some 74 percent of families in the lowest quintile receive a benefit; the average size of which is $420.

I imagine lots of people are responding to the Senate Republicans' obstruction of modest improvements to the stimulus package as Kevin Drum of the Washington Monthly did.

The moral of the story is this: Republicans have no intention of ever working with Democrats on anything remotely like a bipartisan basis. Even on something as trivial as this, they filibustered and won. They will do the same thing next year no matter who's president. They will do it on every single bill, no matter how minor. They will never stop obstructing. Period. Presidential hopefuls, take note.

He makes an important and I think largely accurate point. But it's a little more complicated than that.

The President and House Republicans actually cooperated. The package coming out of the House had bipartisan support and was the product of good-faith bipartisan negotiations.

But during those negotiations, the Bush people ran circles around the Democrats because they asked for too little.

Robert Kuttner writes today:

Why did the Democrats initially settle for so little, and what should they be promoting? Two senior Democratic legislators told me that they were pleasantly surprised when Treasury Secretary Hank Paulson reached out to them and indicated that Bush was serious about wanting legislation. The Democrats felt they needed to reciprocate. For the first time in memory, Bush actually negotiated in good faith, and split the difference with the Democrats. But there wasn't that much difference to split, since the Democrats' opening gambit was so feeble.

In part, their caution reflected the influence of the fiscally conservative Blue Dogs who insisted on a very modest package as their price for coming along at all. Another lead weight on the Democrats' bargaining position was the widespread view that the stimulus should be "timely, targeted, and temporary," lest Bush use it for more permanent cuts in the revenue base. So instead of looking forward to November, or outward to what the country needs, Democrats looked backward to the big Bush tax cuts of 2001 and 2003—whose extension was never seriously in the cards in any case.

Let's name names: those recommendations came from this crew at the Brookings Institute's Hamilton Project.

They should be held accountable, too. Let's start by making sure they and the Blue Dogs keep their hands off the FY09 budget resolution.

One vote short of the 60 needed to overcome a fillibuster by Senate conservatives:

A $158 billion plan to stimulate economic growth failed in the Senate late Wednesday on a 58-41 procedural vote, despite support from a majority of senators.

The bill needed 60 votes to be considered under Senate rules. At the last minute, Senate Democratic leader Harry Reid switched his vote to no, giving him to right to ask for another vote.

The vote was largely on party lines, with all 49 Democrats and two independents joining with eight of 49 Republicans in voting for it.

For the roll call votes, see here.

Reading the press coverage, it's completely unclear to me why Senate conservatives are blocking the Senate bill. The Senate bill costs a little bit more but not much, and, in conference, it's likely to end up somewhere in between. The Senate bill includes unnecessary business tax breaks, but so does the House bill. Maybe there is some other relevant difference I'm missing, but when some moderate Senate Republicans are saying things like this:

“The Senate finance package is far more preferable,” said Senator Olympia J. Snowe, Republican of Maine, adding that it would help people in her state. “You are out there on a daily basis struggling to make ends meet, with skyrocketing energy prices, home heating oil, gasoline, every dollar counts, and that’s what this legislation is about.”

... one wonders what the conservatives are thinking.

This is a good write-up, by the Sierra Club's Josh Dorner, of the green energy incentives in the Senate's economic stimulus bill.

A few reports today bore some very bad news for the U.S. economy. It looks like a recession is on the horizon, if not already underway.

However, the media's attention will be elsewhere, for a little while at least. They'll be focusing on the primaries tonight and tomorrow. That the public's attention will be diverted at such a critical moment, and that it'll be on the primaries, makes the candidates somewhat responsible for crafting a good stimulus package. They (and maybe only they) have an opportunity to speak up and try to improve it.

This is a bad time, being Super Tuesday and all. The candidates probably have other things to do- for instance, sniping at each other over health care. Fighting over these small differences seems petty as a recession approaches. It would serve them well to lead on important issues where they could make a difference immediately.

Tomorrow the primaries will be over, and it may be more clear than ever that the economy needs something much more effective and fair than what we have now. I hope the candidates say the stimulus package is unacceptable and that it needs to be overhauled.

From a report in today's CongressDaily AM, a smart move by Reid:

Senate Majority Leader Reid Monday upped the ante on Republicans, adding $1 billion to the pending Senate Finance Committee economic stimulus measure to help low-income people pay their heating bills.

Senate Democrats are solely focused on getting the necessary 60 votes for the Finance bill, plus low-income heating aid and House-passed mortgage lending provisions.

....

Homeland Security and Governmental Affairs ranking member Susan Collins, R-Maine, up for re-election this year, is co-sponsor of a separate amendment to add LIHEAP funds and said she would back the underlying Finance bill.

Sen. Norm Coleman, R-Minn., also up for re-election, said he would support it.

But oddly, it's the House Dems who are going all squishy:

If the Baucus bill is approved in its entirety, it could run into static in the House, where leaders say provisions such as unemployment insurance and $5.6 billion in energy tax breaks would face an uphill climb.

"Eventually, if this does develop into a recession, I think we'll be coming back to consider unemployment insurance benefits," said House Budget Chairman Spratt, who supports added jobless benefits but said the House plan was the result of "delicate negotiations."

Likewise, he said, provisions such as the energy tax breaks did not belong in this round of economic aid: "This one should stay clean," Spratt said.

The House could pass the Senate bill in a second without any "delicate negotiations" necessary. A presidential veto seems a risk worth taking for an adequate package.

In today's WaPo, Pelosi's office comes up with a better name—recovery rebates—for what they had been calling tax rebates:

House leadership aides appeared to accept that their carefully crafted compromise is likely to change. "We hope for quick action that expedites the completion of the bill so we can send out recovery rebates as soon as possible," said Brendan Daly, a spokesman for House Speaker Nancy Pelosi (D-Calif.).

I like the "recovery" part; the "rebate" part not so much, but still it's good to see the Speaker's office using language that reinforces the public purpose of these payments (see the last two posts).

On the substance of the Senate bill, while I generally have very little good to say about Senator Max Baucus, allowing disabled vets and retirees to receive the same recovery payment as workers was a very smart move.

Democrats relished the opportunity to pit Republicans against retirees and disabled veterans.

"No one can question their sacrifice. No one can question their contribution. And no one can question that they have earned their right to participate in this rebate program every bit as much as any other American," said Senate Finance Committee Chairman Max Baucus (D-Mont.).

If we want people to spend it, behavioral scientist Nicholas Epley argues for calling it a "bonus" rather than a "rebate":

Research on decision-making demonstrates that describing a financial windfall as a “rebate” — instead of something equally accurate — increases the likelihood that people will save it. If Congress and President Bush want to increase consumer spending, they should have pitched these $600 and $1,200 checks as “tax bonuses” instead.

Changing the way that identical income is described can significantly affect how people spend it. In an experiment I conducted at Harvard with my colleagues Dennis Mak and Lorraine Chen Idson, participants were given a $50 check. They were told that this money came from a faculty member’s research budget, financed indirectly through tuition dollars. Roughly half of the participants had this money described as a “rebate,” whereas the others had it described as a “bonus.” When unexpectedly contacted one week later, participants who got a “rebate” reported spending less than half of what those who got a “bonus” reported spending ($9.55 versus $22.04, respectively).

....

Under the House plan, the checks that would arrive in people’s mailboxes would go to those who pay the least income taxes, or even pay no income tax at all. Saying the checks are bonuses — or anything else that would call to mind thoughts of receiving a gift rather than getting a reimbursement — may not only be a more effective description for this stimulus package, but it may also be more accurate.

Taking Epley's logic one step further, it seems to make little sense to include the word "tax" in the description of the payment. A better description might stress the public purpose behind the "bonus", for example, by calling it an "anti-recession bonus."

Senate Finance passed a modified version yesterday that limits the $500 anti-recession benefit to persons with income under $150K and includes some credits for green energy.

Robert Reich thinks that growing inequality is behind our biggest economic challenges. Writing yesterday in the Financial Times, he explains how inequality is generating economic anxiety:

In short, the anxiety gripping the middle class is not simply a product of the current economic slowdown. The underlying problem began around 1970. Any presidential candidate seeking to address it will have to think bigger than bailing out lenders and borrowers, or stimulating the economy with tax cuts and spending increases.

Most Americans are still not prospering in the high-technology, global economy that emerged three decades ago. Almost all the benefits of economic growth since then have gone to a small number of people at the very top.

The candidate who acknowledges this and comes up with ways not just to stimulate the economy but also to boost wages – through, say, a more progressive tax, stronger unions and, over the longer term, better schools for children from lower-income families and better access to higher education – will have a good chance of winning over America’s large, and increasingly anxious, voters.

And in commentary on NPR's Marketplace and his blog, he draws connections between widening inequality and a recession:

Which gets us to the real problem. Most consumers are at the end of their ropes and can’t buy more. Real incomes are no higher than they were in 2000, while food and energy and health care costs are all rising faster than inflation. And home values are dropping, which means an end to home equity loans and refinancing.

Most of what’s being earned in America is going to the richest 5 percent, but the rich devote a smaller percent of their earnings to buying things than the rest of us because, after all, they’re rich -- which means they already have most of what they want. Instead of buying, the rich invest most of their earnings wherever around the world they can get the highest return.

Add all this together and there’s just not enough consumer demand out there to keep the American economy going. We’re finally reaping the whirlwind of widening inequality and ever more concentrated wealth. Supply-siders who want to cut taxes on corporations and the rich just don’t get it. Neither does most of official Washington.

Senate Finance Committee Chair Max Baucus released his anti-recession plan yesterday. Here's a story from MarketWatch; fact sheets from Baucus are available on the Senate Finance website; and the Joint Committee on Taxation description is here.

The plan improves in a few ways on the House legislation: it includes extended unemployment benefits, simplifies the House's $300 to $600 payment by making it a flat $500 payment, and provides the same benefit to seniors and disabled persons who receive at least $3000 in Social Security income. (It's unclear to me whether disabled and elderly persons who receive Supplement Security Income would be eligible for this benefit.) But Baucus also goes in the wrong direction in other ways: he extends the anti-recession payment to high-income individuals and includes new business tax breaks.

Senate Finance takes up the plan tomorrow at 2:30.