As an economic stimulus package grows nearer, it's time to consider the various proposals and the party posturing in context. Not unexpectedly, those groups that have long lobbied for tax reductions (especially for big business and the wealthy) are still lobbying for tax reductions. Even companies that got TARP money from the taxpayers are busy lobbying the government for more tax reductions. (That should have been one of the first strings attached to those funds, among many others.) Even more unsurprisingly, the group that tends to be featured on the Wall Street Journal's editorial pages remains as convinced as ever (at least, in their public persona) that tax cuts are the way to go. You know, that's the crowd that has argued for tax cuts for every imaginable reason, the cure-all for every governmental illness.
So, who has got the right ideas about this stimulus plan, and what should Congress and the Obama Administration do to solve this mess that eight years of Bush and company left us with? This posting is the first in a series over the next few days about the economic crisis and what measures make the most sense to address it.
Let's start with the basics. Just what is the problem we face, and how should our thinking about it be directed?
First, the credit crisis at which the TARP (troubled assets relief program) has been directed is real, but not the only piece of the problem. The heart of the problem is the impact of the recession on ordinary Americans who are losing jobs, losing their homes, losing their savings and losing hope. Whatever we do, we should spend our precious resources in ways that ultimately help people.
Second, any program that will be effective will be massive. We are not in a "slight" downturn but a significant, deep and possibly long-lasting recession. It will take massive doses of economic medicine to cure the patient. Acting on too small a scale will likely have much too little impact to be noticed.
Third, there are both short-term and long-term needs. We do need to "jump-start" the economy to try to spur us out of the worst depths, but we cannot think only short-term else the same problems, in slightly different forms, will come back to bite us again. In addition to some programs designed to have a quick impact on the economy, especially in ways that help ordinary Americans who are hurting the most, we need to think about the kinds of programs that will create a long-term, viable, sustainable economy that will serve the American people well. In other words, growth itself is not the object, but rather economic growth that is both broad-based and sustainable.
Fourth, tax cuts--especially the business and capital and high-income favoring tax cuts of the Bush years--are generally not a viable solution for these problems. Eight years of Bush and company was eight years of an economic philosophy based on cutting government revenues on a seemingly unending basis, with an explicit goal by some of "starving government" and "ending entitlements (read--aid to the poor) as we know it" and with the assistance of deceptive marketing touting unrealistic rosy scenarios about the impact of the tax cuts on the economy and intentionally misleading statements about those who would gain the most. Remember Bush praising the 2001 tax cuts and saying that "average" American families of four would receive about $1800? That number sounded good to lots of people who hadn't really though we needed tax cuts (there was no majority public interest pushing for tax cuts at the time of the (at least) $1.3 trillion dollar 2001 cut), but "average" is almost meaningless when you are putting multibillionaires like Bill Gates and Warren Buffet in with lots of low-paid janitors, housecleaners and the underemployed. Lots of ordinary families got only $100 or so in tax cuts, not $1800 (while Bush and Cheney got tens of thousands of tax cuts out of that one bill). Remember the American Jobs Creation Act of 2004 that really didn't do much at all to create jobs? Remember that very low-tax-rate repatriation provision, that let companies bring earnings from abroad without tax on the ungrounded assumption (no requirement in the legislative language) that more money from lesser taxes means more jobs? The result was that many of the companies that brought back the most money under the low tax provisions laid off employees. Although the companies were not supposed to dividend the money out to shareholders, they did a bunch of stock buybacks, so that the low-taxed money went to their (frequently) high-wealth shareholders, who may well have then invested that low-taxed wealth overseas, causing ultimately even more job loss here. We have, that is, seen a good bit of evidence over the last eight years of the lack of stimulative effect from tax cuts that go heavily to the wealthy and big business, as well as the lack of predictive power of the Laffer curve's so-called "hypothesis". Tax cuts that reduce government revenues do not magically so stimulate growth that they replace the revenues they removed, nor do they stimulate the economy by spurring higher rates of growth than otherwise might be projected. Tax cuts, in other words, generally don't create jobs.
Fifth, In an economic crisis, it is the people who cannot cope, or who are struggling mightily to cope, who need the most direct help. That means that tax cuts should be aimed exclusively at those people, since those cuts, delivered by a reduction in withholding from wages that puts more cash on a regular basis into their hands, will (i) help people who are faced with dire economic situations survive while at the same time (ii) pump that much more money directly into the economy at the local level across the country in the neighborhoods most in need of an economic lifeline, thus extending the economic jumpstart to the small businesses and communities most in need of the same. And that means that some of the direct cash appropriated for projects must go to help that same group of people (with the same expected spreading effect within the local neighborhoods), through expansion of unemployment compensation and health care funding for low-income recipients, aid to states that permit the states to dispense assistance to low-income residents, and similar funding.
Sixth, in thinking about long-term impacts, we must ask polycentric questions and find the right solutions, looking to a sustainable future. That is, we cannot be so focused on economic growth that we disregard the impact of our policies on economic inequality (since it is broad-based growth, not growth concentrated in the top 2% of the income distribution, that will mean a better standard of living for ordinary Americans) or on those areas in which significant changes in our policy approaches are necessary for a sustainable economy over the long term--i.e., environmental, labor, and health priorities. Thus, substantial increases in expenditures for academic research in alternative energy and other high-value, low-impact technologies is essential, as are expenditures that expand use of existing, known high-value, low-impact technologies. (Cf. Jeffrey Sachs, Common Wealth (both blog and book) for more on sustainable economic growth spurred by development of high-value, low-impact technological research, and note that sustainable development is not just a US-centric goal but essential to the Millennium Development Goals. See, e.g., The Earth Institute at Columbia University for more on this.)
Seventh, in the deliberative process, the old rules permitting Big Oil, Big Pharm, and Big Finance privileged access to the decision-making process must not apply. Lobbying by the old influential industries should be highly public and widely publicized--every instance of access should be catalogued on a public website, and every meeting of administrators or congresspersons with representatives of industry should be scrutinized for undue influence. Just consider Big Finance and the disaster of its speculative run-up of profits and spectacular losses thrown on the public, or Big Oil and the way the neo-cons have supported military spending and war to feed the view that the US must exercise hegemony over the middle east oil fields.
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