New Economy Needs Old-Fashioned Stimulus
Knight-Ridder/Tribune Media Services, September 26, 2001
As the American economy officially slides into recession, pressure is building on Congress and the Administration to counteract the economic decline. Prior to September 11, there was some question about whether the government should do anything to stimulate the economy, beyond the Federal Reserve lowering interest rates.
The terrorist attack—with its effect on the airline and insurance industries, as well as the stock market, consumer confidence and spending—has changed all that. Now there is general agreement on the need for a real fiscal stimulus.
It is worth remembering that President George W. Bush's proposed tax cut provided no stimulus whatsoever to the economy. The $300 rebates that millions of Americans have gotten in the mail were the result of a fight led by the Progressive Caucus in Congress. Now that 51-member group of legislators, chaired by Congressman Dennis Kucinich (D-Ohio), is gearing up for another effort to provide a much bigger stimulus—one that will create jobs for the millions of Americans who are being thrown out of work as the economy slows.
What do we need? First, we need something sizeable: at least $200 billion in new spending, or 2 percent of GDP. The US economy was already in trouble before the attack: business investment, profits, and consumer confidence had plunged. The economy had lost a million manufacturing jobs in the last year. Moreover, the stock market has lost about $8 trillion in wealth over the last two years. This alone implies a fall off in consumer spending of about $320 billion that must be counteracted.
It will not be difficult to put federal spending to work on things that this country really needs. Start with federally operated airport security. After that, why not catch up other developed countries and build a 21st century rail system? With the longer waiting times now inevitable at airports, high-speed rail would be faster (and much more energy efficient) for hundreds of millions of the trips now taken by plane each year.
Even more immediately, we will need unemployment compensation to help those who have already lost their jobs—most of whom do not receive benefits under current law. Moreover, state governments typically cut spending and raise taxes during a recession, in order to balance their budgets. This will worsen any downturn. We will need about $50 to $60 billion in Federal revenue sharing to the states just to keep them from doing that.
We could also provide a tax rebate for the 34 million taxpayers who didn't get anything from the latest round. It would take only $8 billion to fully fund Head Start for all the children who are eligible; there are other programs with proven success that could also expand coverage.
Fortunately, we have a large Federal budget surplus—currently running at about $176 billion—available to jump-start the economy. To bring that up to $200 billion would mean only a $24 billion deficit, barely a quarter of one percent of GDP. For comparison, the federal budget deficit hit 4.6 percent of GDP in 1991, during the last recession.
Federal spending on the order of $200 billion would be expected to create about 4.2 million jobs. But some Republicans are still pushing for proposals, such as a capital gains tax cut, that would line the pockets of the rich—without boosting the economy.
Bill Gates already pays a lower tax rate when cashing in millions of dollars worth of stock options than a nurse or truck driver would pay on an additional $1000 of wage income. But Republican Congressional leaders would have us believe that still lower taxes on the rich will jump-start the economy.
The argument is that such a tax cut will lift the stock market. But that $8 trillion in wealth is gone: it was a bubble that has now burst, and most of the illusions about the fabled "new economy" of the nineties have evaporated along with it.
It would be foolish to expect the stock market, which is still overvalued relative to even normal (non-recession) earnings, to fuel another economic expansion. And even Fed chair Alan Greenspan advised Congress that cutting taxes on capital gains, or on corporate profits—as suggested by the Bush Administration—would not help spur an economic recovery.
We need an old-fashioned fiscal stimulus to get this economy moving again. Business investment will follow, as consumer confidence and spending are restored.
But we need to get started soon; the longer we wait, the harder it becomes to reverse the economy's downward trajectory.