Economic stimulus package: criticism grows

One day after the House and White House arrived at a tentative deal on an economic stimulus package that relies exclusively on tax cuts, criticism is mounting about the inefficacy of the deal.  There are a number of significant problems with the deal.  Paul Krugman worries about a "Stimulus Gone Bad" in his 1/25 New York Times op-ed.

First, a stimulus in the form of a tax cut distributed as a lump sum rebate will go to a large number who are financially sound, especially since the income cap is rather high.  The Tax Policy Center has put together a preliminary analysis of the distributional effects of these tax cuts.  See this link.  Krugman has put that information in a very easy to read table on the Krugman New York Times blog.  I've reproduced that picture below for my readers.

Krugman points out that 58% of the money is going to the top two quintiles, where it is not likely to be spent and therefore not likely to be an effective stimulus.  Only 20% is going to the bottom two who are likely to spend it right away. 

Second, even money that is spent may end up buying imports from our overseas competitors rather than helping the US economy (except for the retail distributors of those items).  Shipping more money out of the country seems unwise when we are already using massive government borrowing to finance an overseas war and the Bush tax cuts  (including the recent AMT patch that primarily helps people in the top quintile--those making $200,000 to $500,000).

Third, a more focused package would have given the rebate to those at the low end of the income distribution and then would have also included a number of spending measures that meet real needs at the same time that they provide immediate stimulus.  Food stamps and unemployment compensation have been used in the past because they serve both those functions so well.  The other spending priority that could make an immediate difference is infrastructure spending--bridges, schools, highways and similar much-needed projects that would also employ the construction workers who have seen their livelihood drop away with the subprime mortgage crisis and drop in home sales.  State and local governments can readily use large infusions of cash for many of their urgently unmet needs along these lines.  See Stanford Economist Paul David's comment in the New York Times, Critiques of Spending Plan Retrace Old Debate, in favor of funding for state construction projects and social projects for the poor.  That is money that would be spent locally to provide jobs for local workers. 

There are sounds of discontent from the Senate, and so there is a chance that they will add some of these more reasonable programs to the package.  While they are at it, they should eliminate the tax cuts for businesses--that is just another wasteful giveway.  Even Desmond Lachman at the American Enterprise Institute admits that tax breaks for corporations are wasteful.  See Id.

Comments

[Indentured_Scholar]

But without making that 10% cut to corporate income taxes permanent, how can big businesses continue to afford these multi-million dollar platinum parachutes for failed CEOs when they lose their company and shareholders billions?

[Ben]

The bottom 60% receive 20.3% of national income, according to State of Working America, 2006/2007. They, 6he 60%, get 41.8% of the stimulus. But the bottom half, 50%, of the households own just 2.5% of the net wealth of the U.S.A.
(Consumer Finance Survey) This process appears to be a game of throwing money about without valuing humans. Implicit is the logic that this economy distributes the income in a fair manner, or even a reasonable manner. Supply and demand is the reasoning as for labor reward. But when 1% of the economy receives 18.3% of the income, how is that rationalized by supply and demand? The underlying assumptions go without examination, and they need it. If distribution were fairer and flatter would we have a deficit of aggregate demand? Doubtful.