Bush policies put U.S. on road to second-tier economy and vanishing middle class
As the United States teeters on the verge of recession, the emerging view is that the branches of government responded with notable swiftness to enact an economic stimulus package. Glowing accounts of the striking bipartisanship came forth from the president and congressional leaders of both political parties as well as mainstream analysts.
Quick, however, is not necessarily good. The stimulus package does not come close to bringing the biggest bang for the buck, despite widespread agreement among respected economists across the political spectrum about the most effective options.
One-third of the costs go for a business tax break that cannot help, while two options rejected by the Bush Republicans -- extending the unemployment benefits and increasing food stamps -- are actually six times more effective in stimulating economic activity per dollar of costs than the costly business tax break.
Rather than see the stimulus package as a political and economic success, we see it as a mark of the continued failure of the political system to face problems and design policies directed at ameliorating them.
First, the experience with the economic stimulus package shows clearly that the federal government now lacks the capacity to cope with the massive economic problems that are pushing the nation toward second-class economic status.
Second, the source of this inability is the unshakable ideological belief of President Bush and the Republican Party that income tax cuts are the cure-all for the nation's economic problems. This core belief led to a flawed stimulus package, a repeat of the bad logic leading to the administration's 2001 and 2003 tax cuts.
Third, the 2008 legislation has many of the same flaws as the earlier tax cuts that put the U.S. on the path toward fiscal insolvency, left the middle class in the worst financial straits in the post-World War II era, and brought the widest income inequality since the 1920s-effects we document clearly in our new book, "The Politics of Bad Ideas: The Great Tax Cut Delusion and the Decline of Good Government in America."
We watched in horror as the president and Congress traveled the same road to pass the ineffective economic stimulus package. It seems like we are seeing the movie sequel titled TAX CUT DISASTER III.
As in the first two movies, the ideological commitment to the Great Tax Cut Delusion has been buttressed by Bush's refusal to look at plain evidence of how severely the 2001 and 2003 income tax cuts damaged the fiscal balance sheet of the nation and the health of its economy. This intransigence has been aided and abetted by the continuing reluctance of the congressional Democrats to take a stand against Bush's destructive tax cuts.
A stimulus package similar to the final bill had been negotiated in the House by Treasury Secretary Henry M. Paulson, Speaker Nancy Pelosi, D-Calif., and the House Republican leader John A. Boehner of Ohio. It provided full rebates for most tax filers of $600 for individuals up to $75,000 of income, $1,200 for couples up to $150,000 and $300 per child.
Those earning at least $3,000 a year but paying no income taxes receive $300 per individual and $600 per couple. The main business tax cut allows for "accelerated depreciation."
There is widespread agreement among respected economists of different political persuasions on the impact of available options for stimulating the economy.
Mark Landi, the chief economist of Economy.com, has assessed various tax and spending changes by determining the increased economic activity per dollar of cost. The greater the increase in economic activity for each $1 of outlay, the greater will be the effectiveness.
Landi found the most effective option to be a temporary increase in food stamp benefits that yields $1.73 additional economic activity per dollar of cost. A close second is extending unemployment benefits at $1.64 in increased activity for each $1 paid to the eligible unemployed.
The director of the nonpartisan Congressional Budget Office, Peter Orszag, observed: "Food stamp and unemployment benefits can affect spending after two months, rebates would affect spending at the end of 2008." The Congressional Budget Office rated options on three criteria: cost-effectiveness, timeliness and certainty of effect. Unemployment benefits and food stamps were the only options to win CBO's highest rating as an effective stimulus in all three categories. No other option received the top rating in more than one category.
Accelerated depreciation write-offs -- the main tax cut for business in both the House and Senate --yields $0.27 in economic activity per dollar of tax cut. Thus, its impact per dollar of cost generates one-sixth as much economic activity as that of a dollar in food stamps or unemployment benefits. And the tax cuts cannot be implemented until late spring or summer at the earliest, while unemployment insurance and food stamps could have an effect almost immediately.
Democrats and Republicans made important trade offs in the House package. But the latter shaped the package both by forcing through the roughly $50 billion for business and blocking any benefits for food stamp and unemployment insurance benefits. The $50 billion for benefits to business that the Republicans demanded as the "price" for their support of the stimulus package rendered the $150 billion legislation marginally effective at best.
Senate Democrats lost in their fight for food stamps and unemployment insurance. The GOP won again in the case of a $300 payment to 20 million Social Security recipients and 250,000 disabled veterans after strong protests from the aged and veterans lobbies. The House quickly agreed to add a $300 rebate to the bill.
Senate Majority Leader Harry Reid, D-Nevada, sought to bluff the Republicans. He threatened to put up for vote only the Senate bill that included unemployment insurance benefits and the House legislation without the $300 rebates for Social Security recipients and disabled veterans. But he backed down and the Republicans added not only the $300 tax rebates but an amendment disqualifying illegal immigrants.
One can view the legislation as a victory over gridlock and partisan bickering. The stimulus package gained wide praise as a good bill mainly because it seemed to feature the kind of hard work and compromise by the two parties that had vanished in the Bush presidency. Yet the final legislation is an overwhelming victory for Bush's tax cut ideology over sane economic reasoning.
Why did the Republicans refuse to use the two most effective options developed by highly reputable experts? We can find no explanation in any of the usual suspects: The package was not sensibly designed to stimulate the economy, and, if politicians are held accountable for economic performance, it was not designed to help them stay in office.
In particular, Republican true believers refused to deviate from what the authors call "The Great Tax Delusion," in which tax cuts are the optimum fix for economic ills whatever the "facts on the ground."
Republican tax cut dogma rules out budget expenditures such as unemployment benefits or any other highly effective spending programs on ideological grounds alone. In contrast, the belief in the force of business incentives to stimulate investment is impervious to either economic reasoning or sound evidence showing how poorly this option works.
A September 2007 report by the major Wall Street investment firm of Goldman-Sachs made the point that companies invest money on hand if the expected returns are likely to exceed the costs of a new project, "and that usually requires growth in demand strong enough to put pressure on existing resources."
In the case at hand, it does not take training in graduate level economics, only a little common sense, to figure out that the declining demand in the current downturn makes investments unattractive even if funds are available.
Research gave the same answer. In their Federal Reserve study of the effects of the accelerated depreciation incentives initiated in 2002 and increased in 2003 to stimulate the weak economy, the researchers found "only a very limited impact" at best on new investment.
The Democrats did force the Republicans to improve the economic stimulus package somewhat, but The Great Tax Delusion still dominated the final legislation. Despite this, the economic stimulus package -- a replay of the 2001 and 2003 tax cuts that warrants the label TAX CUT DISASTER III --won praise as the kind of bipartisanship needed in the federal government.
Putting the business benefits in the final legislation is the opposite of real bipartisanship. Bush intransigence and the Democrats timidity produced a bill that had none of highly effective stimulus options and wasted one-third of the total funds on business benefits shown to be ineffective by economic reasoning and research on a similar earlier effort.
The almost-uniform praise by the chattering classes and the press of a process that led to a flawed economic stimulus legislation as exemplary bipartisanship is deeply disturbing, bordering on a national delusion.
Rather than coming to praise this process, we'd like to bury it. It is just one more depressing example that the federal government lacks the will to cope with the major economic problems that threaten the United States.
For seven years, the Bush's tax cut ideology has trumped reality, harmed the nation's economy and its governing institutions, and pushed the middle class into the worst financial mess since the Great Depression.
The Great Tax Cut Delusion and its false promise of a free lunch for the American people must be cast aside as a patent medicine dangerous for the nation's health. If not, we risk speeding rapidly toward a second tier economy and a vanishing middle class.
Of course, the problem with the GOP is that they live in Bush World where Raganomics is king, even though it did not deliver its promises.
From the USENET article that lead to this post:
"The Great Tax Cut Delusion and its false promise of a free lunch for the American people must be cast aside as a patent medicine dangerous for the nation's health."
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