In Whose Pocket Will Stimulus Land?
In coming weeks, both political parties will engage in a lot of posturing about what kind of economic stimulus the flagging economy needs. An economic slump, by definition, is too little demand chasing too much capacity. So if we want to stimulate the economy, we need to put more money in consumers' pockets. These consumers, of course, can be middle-class, poor, or rich. We can also stimulate the economy by increasing public spending. In terms of macroeconomic impact, it doesn't much matter which consumers get the breaks, only that the money enters the stream of commerce.
So the real debate here is less about stimulus than about who benefits. Do we bestow tax cuts on working families or investors? Do we boost public spending by helping fiscally strapped states and cities? Or shelve that spending in favor of more tax cuts?
The White House stimulus package that will probably be announced in January will be mostly--what else?--tax cuts tilted to the upper brackets. These could include a speeding up of personal income tax reductions under the 2001 tax cut, as well as corporate tax breaks. Top candidates are relief from "double taxation" of dividends and reductions in the corporate income tax, supposedly as investment incentives.
As economic stimulus, the case for investment incentives is weak. The economy is awash in excess capacity. The accelerated depreciation breaks in last January's alleged stimulus package did little to boost investment because people don't invest when they see overcapacity. The case for relief of double taxation is even weaker. For starters, there's no double taxation of more than half of corporate dividends because they go to tax-exempt institutions such as pension funds. And a lot of corporate earnings escape initial taxation because of breaks already on the books.
Even the Business Roundtable is more enthusiastic about stimulating demand, via payroll-tax relief, than more tax breaks for business. Outgoing Treasury Secretary Paul H. O'Neill was dismissed partly for his incautious dissent from the Administration's obsession with tax cuts. Oddly enough, his successor John Snow has expressed similar views.
Most GOP politicians favor tax cuts in all economic seasons--when the budget is in deficit and when it is in surplus, in booms and in busts. Tax cuts slash revenues and constrain the size of government. This is their principled reason. But Republicans also use tax cuts to reward business allies, which has nothing to do with principles. "Stimulus" is merely the rationale du jour.
Historically, Democrats have contended that in a downturn, tax relief for low- and middle-income consumers yields more economic stimulus because these groups go out and spend the money. In principle, this view offers Democrats a chance to draw a contrast with the GOP program.
However, unlike Republicans, who are mostly unified on both its tax program and underlying philosophy, Democrats are split three ways. A balanced-budget faction, including Senator Kent Conrad of North Dakota, outgoing chair of the Budget Committee, and Presidential aspirant Senator John Edwards of North Carolina, considers the Republican program fiscally irresponsible and resists tax-cutting or spending.
A second contingent, which includes the House and Senate Democratic leadership, has criticized the Bush tax cut but has been too intimidated by Bush's popularity to demand its repeal. This also leaves Democrats little running room for spending programs or worker tax relief.
The Democrats' election debacle, however, has shifted momentum to a third group, which challenges the Republican program frontally. Massachusetts Senator John F. Kerry declared in his first speech as a prospective candidate for President that most of the 2001 tax cut for the wealthy should be shelved in favor of immediate payroll-tax relief to put money in the pockets of ordinary wage earners (and make it cheaper for business to create jobs). Kerry also proposed extended unemployment benefits and targeted investment and dividend breaks. Other pro-spending Democrats are working on a program of fiscal relief for states. This mostly demand-side approach could appeal to more voters as well as provide more targeted stimulus.
Confusing arguments over values with arguments over technical policy choices is an old story. Under President John F. Kennedy, chief economic adviser Walter Heller sparred with kitchen-cabinet kibitzer John Kenneth Galbraith over the best kind of fiscal stimulus--tax cuts or public spending (Heller won, and taxes were cut). But their real argument was about the need for increased social outlay and the size of government. Likewise under Ronald Reagan, deficit spending through tax cuts was dressed up as supply-side economics, but the deeper goal was to shrink the public sector by starving it.
Politics is about choices. Politicians should admit that in an economic downturn, one dollar of deficit spending is roughly as good as another--and start debating the real issues.
By Robert Kuttner