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TechnoratiHouse Democrats and the White House have reached an agreement on an economic stimulus plan. Unfortunately, the plan - which essentially consists of nothing but tax cuts and gives most of those tax cuts to people in fairly good financial shape - looks like a lemon.
Specifically, the Democrats appear to have buckled in the face of the Bush administration's ideological rigidity, dropping demands for provisions that would have helped those most in need. And those happen to be the same provisions that might actually have made the stimulus plan effective.
Those are harsh words, so let me explain what's going on.
Aside from business tax breaks - which are an unhappy story for another column - the plan gives each worker making less than $75,000 a $300 check, plus additional amounts to people who make enough to pay substantial sums in income tax. This ensures that the bulk of the money would go to people who are doing O.K. financially - which misses the whole point.
The goal of a stimulus plan should be to support overall spending, so as to avert or limit the depth of a recession. If the money the government lays out doesn't get spent - if it just gets added to people's bank accounts or used to pay off debts - the plan will have failed.
And sending checks to people in good financial shape does little or nothing to increase overall spending. People who have good incomes, good credit and secure employment make spending decisions based on their long-term earning power rather than the size of their latest paycheck. Give such people a few hundred extra dollars, and they'll just put it in the bank.
In fact, that appears to be what mainly happened to the tax rebates affluent Americans received during the last recession in 2001.
On the other hand, money delivered to people who aren't in good financial shape - who are short on cash and living check to check - does double duty: it alleviates hardship and also pumps up consumer spending.
That's why many of the stimulus proposals we were hearing just a few days ago focused in the first place on expanding programs that specifically help people who have fallen on hard times, especially unemployment insurance and food stamps. And these were the stimulus ideas that received the highest grades in a recent analysis by the nonpartisan Congressional Budget Office.
There was also some talk among Democrats about providing temporary aid to state and local governments, whose finances are being pummeled by the weakening economy. Like help for the unemployed, this would have done double duty, averting hardship and heading off spending cuts that could worsen the downturn.
But the Bush administration has apparently succeeded in killing all of these ideas, in favor of a plan that mainly gives money to those least likely to spend it.
Why would the administration want to do this? It has nothing to do with economic efficacy: no economic theory or evidence I know of says that upper-middle-class families are more likely to spend rebate checks than the poor and unemployed. Instead, what seems to be happening is that the Bush administration refuses to sign on to anything that it can't call a "tax cut."
Behind that refusal, in turn, lies the administration's commitment to slashing tax rates on the affluent while blocking aid for families in trouble - a commitment that requires maintaining the pretense that government spending is always bad. And the result is a plan that not only fails to deliver help where it's most needed, but is likely to fail as an economic measure.
The words of Franklin Delano Roosevelt come to mind: "We have always known that heedless self-interest was bad morals; we know now that it is bad economics."
And the worst of it is that the Democrats, who should have been in a strong position - does this administration have any credibility left on economic policy? - appear to have caved in almost completely.
Yes, they extracted some concessions, increasing rebates for people with low income while reducing giveaways to the affluent. But basically they allowed themselves to be bullied into doing things the Bush administration's way.
And that could turn out to be a very bad thing.
We don't know for sure how deep the coming slump will be, or even whether it will meet the technical definition of a recession. But there's a real chance not just that it will be a major downturn, but that the usual response to recession - interest rate cuts by the Federal Reserve - won't be sufficient to turn the economy around. (For more on this, see my blog at krugman.blogs.nytimes.com.)
And if that happens, we'll deeply regret the fact that the Bush administration insisted on, and Democrats accepted, a so-called stimulus plan that just won't do the job.
Paul Krugman is Professor of Economics at Princeton University and a regular New York Times columnist. His most recent book is The Conscience of a Liberal.
Copyright 2008 The New York Times Company
44 Comments so far
Show AllThat's right -- a Ponzi scheme or shell game. The only way they can afford to pay for any sort of stimulus (other than by borrowing) is to raise taxes on the upper-classes and close corporate loopholes.
Great, just what is needed, another "loan". As if there isn't a credit crisis already, both ways - borrowed too much and now there is a lack of credit. The difference with this package is we can just stack the money this plan will cost on top of the other $9 trillion or so debt. It should be a tax credit to ALL, including those who do not pay income tax. Wherever did the idea come from that those who do not pay income tax are not taxpayers? The best this plan can do is stave off the inevitable and maybe get folks through the winter. If and when it goes through, you can expect to see a GDP bounce in whatever quarter the money becomes available. Anybody remember the 3rd quarter bounce in 2003 when the extra child tax credits were sent out to all? That little move bounced 3rd quarter GDP to 8% - astounding. Naturally the Bush Admin. claimed it was due to their financial wizardry. The reality is this too was added to the mountain of federal government debt.
Kayaker, yes, true. But a lot of people didn't spend the money they got from credit on "luxuries". A lot of them did it just to survive, just like some of our "volunteers" to the military had no economic choice but to join.
The reason workers wages have stayed stagnant for so long is that instead of raises, we got credit. Think of the old company store. If you are being paid a below living wage, have credit at the company store, live in a company house you pay rent or "mortgage" dollars to, etc, etc, how long do you think it will be before you are technically bankrupt and indentured to your employer?
The whole system was set up for corps/banks/elite to reap all profits, not pay salaries or benefits to workers and to get them into horrible debt so they could reap even MORE profit at the expense of the employee.
I also find that a lot of people who didn't have to resort to credit were wealthy to begin with, you already had a leg up. For instance, if your mommy and daddy paid for your college, you leave without debt. If you have to pay for it yourself, through student loans, you leave college with tons of debt. Please don't paint all people in debt with the same brush, you sound more like one of the "masters" when you do.
Atexan,
I did not say the Democrats were good. I simply made a statement that the result of holding out for a "perfect" solution (assuming such a thing even exists) often results in squandering opportunities for imperfect, but relatively positive (good) solutions.
2000 is a perfect example of that. Not that I think a Gore presidency would have rivaled FDR - or maybe even Carter - but it certainly would have been better than what we got - by several orders of magnitude. But Bush was put in a position to steal the election because of the Naderites who couldn't bring themselves to accept a viable solution that wasn't their ideal.
As I have stated innumerable times, I am frustrated and angry at the Democrats performance this year. However, implying there has been NO change from previous years and stating that Bush still gets whatever he wants is simply not factual. Has Congress checked Bush or even slowed him as much as they should have? absolutely not. Part of that goes to ineffective leadership but at least as much goes to the diversity of the Democratic caucus. With such a slim majority, that diversity makes it very difficult to be effective. I say, give them enough of a mjority to insulate against defections and see what happens. I'm all for winnowing out DINOs like Lieberman but, in virtually any case, I would much rather have any Democrat than a Rebublican.
BTW, saying something is not the solution is NOT is not the same as offering a solution. So, I ask again; What is your solution? If you have a viable alternative that will improve things in November, I'm all ears.
I probably will not benefit since I earn more than 75K but less than 1M so I don't get a rebate or a tax cut. I do know that the Bushistas who don't really need the $600 will be wise to invest the money in the PWP. (google it and check it out)The Perpetual War Portfolio is an evenly weighted basket of five stocks poised to succeed in the age of perpetual war. The stocks were selected on the basis of popular product lines, strong political connections and lobbying efforts, and paid-for access to key Congressional decision-makers.The PWP has out performed the DOW 3 to 1, the S&P 500 2 to 1 and the Nasdaq almost 2 to 1. It will be a hedge against recession and turn 600 to 1800 in 3 or 4 years.People who say Bush hasn't simulated the economy just aren't investing the same way he does.
If we want to see a beneficial New Wolrd Order it is time for the American public to vote Democrate and choose a candidate like John Edwards who will make it possible to start a PWPP People With Power Portfolio where investments in green technologies for conservation and altermative enegy will eliminate our need to fight wars for oil and create well paying employment for millions of Amerticans.
What's your solution? Who has a realistic shot of doing any better?
Here's a solution for socialist-thinking ( if you can say that word )American voters . Vote for the Dem nominee for president as the lesser of two evils and after the job is done , concentrate on winnowing out the Congress hopefuls ,district by district , who are not as socialistic as Dennis Kucinich , Mike Gravel , Bernie Saunders...or create a new one who is.
Voting Dems "wall to wall" without the above winnowing is typified by the blinkered voting for Joe Lieberman because he "was" Dem.
If it's just a tax credit, won't people who qualify get the same credit anyway when they file? If so and they take the money and spend it, then they won't be able to use it to reduce the tax they have to pay, is that not so? That is clearly just smoke and mirrors if true, and will only cost more to put on the show. Does anyone know how it actually works? Is it an additional tax credit on top of the standard one? Admittedly, I'm a little confused.
This is how bad it got:
http://news.yahoo.com/s/afp/20080125/lf_afp/uspropertyfinanceanimals
Family pets fall victim to subprime crisis
by Mira ObermanFri Jan 25, 9:27 AM ET
Maybe these days compassion only works if we focus on animals first?
This so called economic stimulus package is actually in the words of Jack Beedee, of the Atlantic Monthly, an "Incumbency Protection Package." I heard several Dems--my Congressman included, say exactly what Krugmann said about how targeting this to the poorest would be the most effective "stimulus." since it would go for food and necessities and would get spent right away. They know this because this has been done twice before and it didn't work. Most folks will pay down debt or save it, or worse yet, spend it on cheap Chinese products.
So if the Dems knew, and they did, because I heard several say so, that increasing Food Stamps and extending Unemplopyment Comp would serve a dual and useful purpose, why did they cave to the Rethugs? They are supposed to be in the majority... ain't that right D David? But no!!!! They didn't pass what they knew was best for struggling citizens they claim to care about, and at the same time do the best thing to try to address the economic downturn and let Bush veto it? They just threw their Rethug collegues a political life preserver.
Who here can see electing more of these complicit asses as the solution? Can I see a show of hands, please???? I am so disgusted I could spit nails! They all deserve to be kicked out on their butts come November. Even my grown kids see through this sham---this attempt to buy them off with crumbs while they pillage the entire country.
professor truth quoted Michael Parenti, just above (1:05 am). But he accidentally made a typo. The quote is "There's only one thing the rich desire……..EVERYTHING!"
A junkie thinks about one thing...the next fix. People in the USA are addicted to easy money. Money on credit, money from a stock market bubble, money from a real estate bubble, money from an inheritance. If they can look forward to a few hundred dollars in the mail that they didn't have to work for they will take it just as quickly as a junkie takes the needle.
The oligarchs have now done to the US what they've done to countries around the world: create such a massive debt as they steal wealth that forces all the valuable assets in the US to be privatized in order to pay off that debt. This game plan has succeeded in all countries victimized by the IMF and World Bank, whose loans were used by the corrupt oligarchs in power to control and, ultimately, take over the valuable assets of each country preyed upon. As Michael Parenti once said years ago,"there's only one the the rich desire........EVERYTHING!
TAX STIMULUS EXPOSED
Nothing could be more clear than the real intent of this token tax stimulus package. It is a diversion tactic to forestall desperately needed reforms to the real and unprecedented threats to our economy, our environment, and our security. They include our dependance on foreign oil; trade imbalances; ownerships (and eventual control) of our infrastructure by foreign countries; and our degrading environment fueled by this administrations war against science.
Unless Americans compel this defaulting legislator to force meaningful and urgent reforms on to this reckless unelected zealot and his supporting interests--and prevent such outrageous abuses from future administrations--they will have only themselves to blame for our inevetible demise.
$300 could buy half an ounce of BC Bud that will get you stimulated.
To Brissot,
You said "The perfect is the enemy of the good". That is poor analogy.
The Democratic party is not good. The Democrats have been the majority
in Congress for more than a year. What did they accomplish? Nothing and
zero. They gave Bush everything he asked for and did not change a thing.
Clinton came and shoved NAFTA down our throat after campaigning saying
that he is against it!! He passed the Telecommunication act that concentrated the Media in the hand of the rich and powerful. He starved
to death more than half a million Iraqi by imposing cruel and inhumane
embargo. And I can go on and on and on...
You ask me what is the solution. My answer is that the Democratic party is
not the solution. It is part and parcel of the problem.
The fact of the matter is, Bush does not care what happens to the money. By issuing money he does not have, he must borrow 145 billion.
The Fed can monetize some or all of that by buying treasuries with money they do not have but can create out of thin air, and increase the money supply up to 1.45 trillion at current reserve ratio requirements.
The money that is given to consumers all ends up the commercial banking system in the form of deposits, or if they spend it, it goes into some retailers bank account.
He does not care if people default on their homes and lose them, since the banks replace an intagible asset (loan) with tangible asset (property). But with housing prices in decline, they need additional deposits to make up the difference in cases where housing prices are lower than the loans principal, and so that's what the 145 billion-1.45 trillion will do.
In December, consumers spent 350 billion. Giving them 145 billion, which probably will take months to get into the system, and much of it will not be spent at the retail level, is like pissing on a burning house to put out the fire. But Bush probably likes crispy critters.
Atexan,
The Democratic "leadership" sucks. Democrats, in general, have moved way, way, way too far to the right ... er, I mean, "center". No argument there.
But this line about two sides of the same coin is baloney. (At least, so far.) Its a matter of degree. Its like saying there is no difference between a spring shower and a monsoon - they're both rain.
While the Democrats are continually outmanuevered by the Republicans, they cannot seriously be compared to the depth of depravity represented by the Republican party of the last 14 years.
Let's just say you're right. What's your solution? Who has a realistic shot of doing any better?
The perfect is the enemy of the good.
To Daniel David
It is now obvious even to the blind that there is no difference at all
between the Democratic party and the Republican Party. They two sides of
the same coin are partners in doing Big Business/Money bidding.
Your continuous singing the praise of the Democrats is geting to be both
quite boring and trite. Are you a paid huckster or what??!!
The whole things is a scam and a boondoggle, to be rushed through so people don't have the time to think it through.
Say they send you a check for $600. If you're an ordinary person, living check-to-check, you spend it on food or heat or gas or other necessities. Then, come January 2009, you find out that because you got that check, your fine-tuned tax balance is all out of whack, and instead of getting a tax refund for $250, you now OWE the IRS $350, and your life is even further in ruins.
But no - people look as far as the next can of beer or WWF show on the boob tube, and trust that no, the government will do what's best, regardless of the evidence.
Criminal greed is all.
Economists are snake oil salesmen of the highest order and are unreliable for advice. If they had been doing their jobs, better yet really knew what they were talking about, we wouldn't be in this mess in the first place.
People seem to have few options. They can take this BRIBE and buy worthless junk made mostly by people from other countries, which stimulates their economy, but not ours. They can put it in a bank, which is a boon for bankers who are part of our debt problem, but that won't help our economy either. They can pay down some debt, but compared to what Americans now owe that is just a fart in a hurricane, and very minimally helps our economy.
You can get drunk or high, but since much of that money will eventually flow to drug cartels & foreign liquer companies that will do little good.
Or you can pay to get laid...now that's something that IS a domestic product, AND you can claim you are doing your patriotic duty by 'stimulating' (even if it isn't primarily the economy) LOL.
The thing that would be most useful, though difficult to organize, would be to have all those pissy insulting $300 checks pooled together to start a new auto manufacturing company for cars that get 100 MPG, or a company to massively invest in renewable energy production (and I'm not talking about the stupid idea of growing food for fuel here). As citizens, if we crawl out from under the jack-boot on the neck onus of oil, our economy will automatically rebound because the rebate will be considerably larger by a factor of at least three AND IT WILL BE A YEARLY PERMANENT REBATE. How is this, you ask?
Our yearly military expenditures could be halved if we didn't have to go overseas to STEAL oil, and that will save us $500 billion PER YEAR. Think about it, then raise hell.
Perhaps there are grounds for hope. Maybe a really bad depression would make the lesson compelling, as a minor would not. It is said that sometimes things have to get worse before they can get better. The temporary suffering might be rewarded over the longer term.
The best article I have read here concerning our economic picture is the "Sheppard Bliss" article titled "Bermanke Rides To The Rescue". Scroll down about eight or ten artices, it is truly scary.
The author has the credentials to know what he is talking about, a brief bio is at the end of his fine article.
I heard and saw on three different news channels, that its $600, or $1,200 for a married couple and the money will be borrowed from China.
As Hucksterberry stated, most of that money will be spent at Wal-Mart, Sears, K-Mart, etc and most of their mercahandise is made in China. The only correct statement I've heard him speak.
This is mind-boggling. We borrow money we don't have, or to even have to pay back to the lender. Of course that $600 will be taxable income too. There is no question it is insane, but not unexpected. The finacncial mess our nation is in is far, far worse than our MSN is broadcasting and the politicians are truly frantic. Frantic people do crazy things. If they are already insane, it's normal as usual. I'd bet Putin and the Chinese leaders are laughing their asses off. __ I'm not.
Just the mere mention of FDR will earn Mr. Krugman scorn off by the right wing nutsoids, who in their ideological/theological clap-trapped minds have forgotten that the US of A was founded on a government for the people, by the people. ANy money spent bythe government for the people, benefits the people.
Greed. Pure greed. Ideological greed. Craven greed. Sick perverted greediness. Right-wing greed. Conservative greed. Republican greed. Unmitigated greed.
Cowardice. Pure cowardice. Ideological cowardice. Craven cowardice. Sick perverted cowardice. Left-wing cowardice. Liberal cowardice. Deomcratic cowardice. Unmitigated cowardice.
That about sum it up?
This was easy to anticipate when well over half the USG is to the right of Hoover and all are wedded to the Growth Mantra dynamic within the Capitalist Myth. As I said earlier, the "stimulus" is just Corporate Welfare dressed up as support for the middle class.
It's a sad fact that the best thing that could happen to the world is the utter collapse of the US economy, its corporations and government.
The tax rebate is another of this country's savage double standards.
The government is about to bail out the bonds industry, but no welfare for the down-and-out.
Bush rigidly won't support a public works program, but his no-bid contract buddies are contracted by the US government to engage in public work projects...in Iraq.
The these savage double standards reflect the US's savage economic inequality.
I have largely dropped out of the economy. I didn't get a check last time, and I won't this time, because I pay no tax.
So I'm probably a bad person. I don't "go shopping" when thousands die in an attack and that's the only sacrifice the President asks of me. I have a rich and stimulating life, making biodiesel, cutting firewood, growing food, interacting with community members, and I don't need "clitoral economics" to stimulate me.
If everyone tried to do this, no one probably could. But everyone cannot go on living as they are now, so you might as well "drop out" while the droppin's good!
The national Democratic party is either impotent, stupid, or merely loyal--to the business interests that regularly fill their campaign fodders. What a waste of a party -- at least at one time -- under FDR -- it was responsive to the needs of working Americans.
But today change will not come from Congress or the President--they are all bought and paid for. We have to look elsewhere.
With a little luck, most Americans will either use their check to pay down debt or put the rebate into savings. Effective stimulus? No, of course not, but it's better than using the money to run out and buy unneeded consumer goods (like say, clothing, that is mostly made in other countries.) Uncle Sam going in a little deeper is better than debt-swamped consumers.
The absolute best economic stimulus would be the election of a Democratic president and Congress together. It would give people hope and the stock market, for instance, would likely go straight up on that "hope" alone.
These arrogant journalists talk about the American middle class as if it had something to do with the economic problems the country faces. The "stimulus deal" is their way of giving themselves absolution from the coming economic hardships middle America will have to endure as it slips into the status of third world country.
Hoa binh
This is just more lipstick on a pig that is headed for the slaughter house. Well, bring it on!! The coming economic collapse will be bipartisan. Cool.
Oh, and don't tear up that check if you get one. Donate it to a local charity organization that can help the poor, elderly, homeless, and hungry. If our stupid government won't put OUR money in the right hands, maybe WE can.
Well, whoop-de-do! With all the damage that government economic policies have done over the last 30 years, you'd think they'd owe the average citizen a wee bit more than a measly $300. And then they tell us to spend it on goods made in the U.S. That would have been a great idea for saving the economy in, uh, 1973. That $300 is going to go through most people's bank accounts faster than s**t through a goose. A grocery bill here, a doctor bill there . . . and then what? Back to scrimping through every month to make ends meet, that's what. $300 is $300, but if the public had any self-respect they'd tear up those checks and throw 'em back in the politicians' faces, and tell 'em it takes a lot more than that to buy off a red-blooded U.S. citizen. It's insulting, I tells ya.
It's just smoke and mirrors. I don't need a rebate check. Mine will go in the bank. It won't cause me to spend any more than usual.
If I were a Democratic legislator (which, thank the Lord, I'm not, sir), seeing Dubya digging away in his hole, I'd be tempted to hand him a bigger shovel.
Too much consumer spending coupled with too much supply-side hosing is what got us into this mess. How's spending going to get us out?
This will probably shape up to be a permanent taxcut for the wealthy, pawned off as a one-time bribe for the lower- and middle-class.
And no checks to seniors on social security who must choose between medicine and heating bills.
Were they afraid these people would stick the checks under the mattress and save it for a
sunny day? Anyone in a situation like that would have it spent the day they got it.
T'would seem that after 2 and a half decades of "trickle down", they're willing to try "trickle up" - but only so long as the trickle starts, well, pretty close to the top.
According to reputable polls, Americans support the reintroduction of public works programs and, in lesser numbers, support extending and expanding welfare and unemployment benefits.
So, we live under a Republican administration that has lost the respect, trust and support of most Americans We have a Legislature whereby the Democrats hold the majority. Last, the Democrats' earlier stimulus package was supported by the majority of voters.
What do we get? Democrats rolled over. They aren't worth shit.
Gee whiz...I could get $300 back and then only owe another $200 on my heating bill. Lucky me
Meanwhile the NYTimes endorses the "brilliant" Ms Hillary...
You know that Bush won't be held accountable--but the Clintons have always been open game--precisely because they never take a strong stand for the country against the onslaught of the Right. It makes them easy targets since they are sleazy operators with no ethical compass. The Clintons will get hit, and I am sure they will get what they deserve.
Let us hope the end is quick and over fast.
Right. The Bush administration succeeded again. It has nothing to do with the complicit Democrats who are in the majority. They simply won't pass a good bill and say, "Go ahead, Mr. President. Veto the chances of a Republican taking office again."
I'm sick of this talk of "caving." Nobody who wanted a real stimulus package caved. The phony Democrats simply did Bush's work for him.
It's time for "tax the rich" to come back. This recession was caused by them, it's theirs to clean up.
What idiocy. Borrowing money from China, or maybe just printing it, to pass out to people, even those who need it, is madness. The fact that anyone talks seriously about a "stimulus" is a joke. Ever heard of "pushing on a string"?
The 800 pound gorilla is a war we can't afford that is diverting valuable resources that could be used for investment here, private as well as public. Simply put--bankrupting us. Talk about putting national security at risk! This war is totally tied to high oil prices--first by the geopolitical risk factor and second by increasing demand. And high oil prices is a big factor in the squeeze on the poor and middle class including those not affected by the stupid banking mess.
Stop. Think. One candidate sees it like this. If you can vote in a Republican primary you should do so and vote for Ron Paul. He won't get the nomination but we have to make an antiwar, anti-debt, pro civil liberties statement now that DK is out. RP says the Dem most like him is DK--at least on foreign policy. Speak now or forever hold your peace.