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When it comes to stimulus, President Bush and congressional Democrats may not quite be on the same page, but at least they are reading from the same book. I just wonder whether it is the right one.
Bush said today he supports a quick, temporary fiscal boost of about 1 percent of Gross Domestic Product, or roughly $140 billion. He said it should include broad-based individual tax relief along with investment incentives for business. While he put in a plug for making his 2001 tax cuts permanent, Bush did not insist that such an extension be included in a fiscal relief plan—a major concession to political reality.
While Bush did not lay out specifics, the White House is hinting that his plan would be built around the temporary suspension of the 10% tax bracket and a proposal to allow business to immediately write-off half the cost of new equipment purchases.
Democrats won't buy Bush's plan for individual tax cuts, which would provide no benefits to one-third of filers who pay no income tax. They are more likely to back rebates for all, or at least for those who pay payroll taxes. Similarly, the Democrats will insist on less generous investment tax breaks and demand some new spending, including an expansion of food stamps and unemployment benefits, as well as aid to the states—all items the White House is likely to oppose.
These are relative quibbles that could be worked out fairly quickly, if the politicians are in the mood. But whatever they do, it isn't likely to help fix the underlying causes of the current slump.
Today's slow-down seems to be driven by three factors: high energy prices, high defaults in the subprime mortgage market, and the related credit crunch, the magnitude of which we don't yet understand.
It is easy to see how $100 billion in tax rebates would help soften the blow of high energy prices. However, I thought we wanted to reduce energy consumption, and high prices are a pretty good way to do that.
It is harder to see what this stimulus will do for the subprime mess. A thousand extra dollars in the hands of a family on the brink of default may buy them a reprieve of a couple of months, but it won't save their house.
The credit crunch seems to be driven by a number of large financial institutions that made some truly stupid investments. This problem will resolve itself only once these firms write-down their losses and again begin lending to credit-worthy borrowers. I am not sure how tax rebates will speed up the process.
Until banks start lending again, many companies won't have money to invest, tax breaks or not. Of course, some businesses are rolling in cash and can easily buy new equipment. But why do we need to help them?
A consumption-based stimulus may cushion the blow for some, but it won't fix the structural problems that got us here.
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