Half-a-Loaf Stimulus

Half-a-Loaf Stimulus

Good news in the stimulus package: low and middle income Americans receive cash to rev a slowing economy. Bad news: tax breaks for businesses won’t help much at all.


The $168 billion stimulus package signed by President Bush today will provide a needed boost to a struggling US economy. The size and timing are right. Unfortunately, however, the Administration and its Congressional allies rejected the consensus opinion of economists and insisted on provisions that make the package about half as effective as it could have been. Those shortcomings should be addressed in a follow-up plan built on sound economic reasoning, rather than political favors and ideology.

First, the good news: the bulk of the money will flow directly to low- and middle-income Americans in the spring or early summer. They will receive checks ranging from a few hundred to several thousand dollars, depending on family size and income. Not all of this money will find its way directly into the economy–as much as half may be socked away in savings or used to pay off debt–but what is spent will help preserve jobs and slow the economy’s accelerating downward spiral.

It’s tempting to write off these payments as election-year politicking, too small to make a difference, dwarfed by the enormous housing crisis and ballooning personal debt levels. But multiplied by millions, the individual rebates should provide a significant boost. Imagine, for example, that 1,000 residents each take $300 in stimulus money to a local Target store. That adds up to $300,000 in extra revenue, enough to keep the store from laying off a couple of employees, who then can spend their income on other goods and services. Multiply that effect hundreds of thousands of times across the country, and you’ve made a dent in the twin trends of rising unemployment and shrinking retail spending.

Now, the bad news: the White House and Republican leaders in the House and Senate, responding to a tsunami of lobbying from the Chamber of Commerce, National Association of Manufacturers and other business groups, insisted on including tax benefits for businesses that will do little if anything to break the recessionary cycle. For instance, businesses will be able to write off twice as much capital spending this year as in normal times, shrinking tax income to federal and state coffers. This was sold as a device to speed up investment spending, such as expanding a manufacturing plant or building a new store. But common sense argues against it: businesses are more likely to expand when consumers demand more products. And in fact, modeling by Mark Zandi, the respected chief economist of Moody’s Economy, ranked business tax breaks as the least effective stimulus option under consideration.

Senate leaders tried to inject sound economics into the package by adding an extension of unemployment benefits and speeding up government spending for needed maintenance and repairs of schools, highways and bridges–helping those hit hardest by the downturn, and directly creating jobs while improving the nation’s infrastructure. Both approaches would be far more effective than the business tax breaks that were enacted and more effective even than the individual tax rebates.

Democrats are already signaling that they will raise these issues again, and it’s likely that support will grow as the economic downturn continues.

This stimulus won’t address the nation’s long-term economic problems, which are more fundamental and will take years to fix. Its purpose is to reduce the immediate pain of a shrinking economy. This package will help, but because its design was flawed, it won’t be enough and more effective intervention is needed.

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Katrina vanden Heuvel
Editorial Director and Publisher, The Nation

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