Stimulating Politics

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Dean Baker
The Guardian Unlimited, January 21, 2008

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"Democratic leaders in Congress should exploit Republican vulnerability to craft a stimulus package that really helps the US economy."

Treasury Secretary Henry Paulson is known as a cheerleader for President Bush's economic record. That is why his sudden cry last week that the economy is in "urgent need" of stimulus from the government is so striking.

Thriving economies don't need stimulus from the government. Sick economies need stimulus and only very sick economies, facing the risk of a severe recession, are desperately in need of stimulus. And you know that conditions are dire, when the Bush administration's economic cheerleader starts begging for Congress to come to the rescue with a stimulus package.

The logic is simple. One of the most solidly established facts in US politics is that the party in the White House gets blamed for a recession. Richard Nixon lost to John Kennedy in 1960 in large part because voters held Republicans responsible for the recession that year. Similarly, Ronald Reagan effectively blamed Jimmy Carter for the 1980 recession, ending his political career.

2008 was already looking bad for the Republicans. The Iraq war remains highly unpopular and President Bush's approval ratings have been hovering near the all-time lows hit by any president. If you throw an economy with high and rising unemployment into the mix, the Republicans could well be looking at a Barry Goldwater moment, a defeat of historic proportions. President Bush does not want a Democratic tsunami to be his historic legacy, which is why Henry Paulson is now crying for help.

Of course he is right. The Bush administration, along with the Greenspan Federal Reserve, allowed the housing bubble to expand to ever more dangerous proportions. It was inevitable that it would burst and wreck havoc on the economy. The only question was the exact time and shape that the collapse would take.

It is certainly good news that Secretary Paulson recognises the crisis facing the economy and that he is reaching out to Congress for help. Congress should rise to the occasion and quickly produce a stimulus package, but it must recognize that it holds the cards right now. The only thing that can save the Republicans from demolition in the fall is a successful stimulus package. This means that the Democratic leadership can design a package to meet longstanding needs. It does not need to be constrained by the guidelines set down by President Bush.

This means first, that the tax cut portion of the stimulus can be designed to ensure that low and moderate income workers get their share. This would not only make the rebate package more equitable, it would also make it more effective. Research shows that low and moderate income households are far more likely to spend their rebates than higher income households. And to be effective stimulus, people have to spend their rebates. Extending unemployment insurance and increasing food stamp benefits are also effective ways to quickly boost spending.

By this standard, Congress can safely ignore President Bush's request for tax cuts for business. There is a large body of research showing that business tax cuts have little or no effect on investment.

Congress can also insist that a portion of the stimulus be "green," providing a down payment on reductions of greenhouse gas emissions. A generous tax credit (30%-40%) for increased home insulation or other conservation measures would be the quickest green way to pump money in the economy. The collapse of the housing sector has put hundreds of thousands of construction workers out of work and made contractors desperate for business. If Congress put a tax credit in place, contractors would immediately begin chasing after homeowners and businesses to do the work.

As another green measure, Congress could allocate additional funds to public transit systems in exchange for specific commitments to reduce fares. This would effectively provide a tax rebate for public transit users. This would both stimulate the economy by putting money in the pockets of transit users, but it could also have long-term benefits if temporary fare reductions lure more riders, and some of them change their travel habits permanently.

Congress can look for other innovative ways to ensure that a stimulus package have lasting benefits for the economy, but it must recognize that it is in a position to design a stimulus package of its choosing. President Bush is not in a position to veto a stimulus package. He may not care about the economic damage caused by vetoing a stimulus package but he will not want his legacy to be one of the biggest electoral defeats in history.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.