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Will It Work? That’s a Tough Question.

February 16th, 2009 . by economistmom

I’ve been trying to think (often out loud here) about the variety of things the “recovery and reinvestment” (don’t-call-it-just-”stimulus”) package is supposed to accomplish.  And now that it has passed and will very soon become law, the politicians are all trying to position themselves so that whether it “works” or not, and whatever parts of the package they supported or not, they’ll end up looking like they knew best.  They may all get away with this political-posturing strategy, because the goals of the package and the policies that combine to make up the total package are so varied, that no matter where the economy goes from here, it’s unlikely we will come to definitive conclusions about which policies “worked” and which did not.

It strikes me that the ways the recovery package is most likely to make a difference are in fact the ways in which we least know how to measure the value.  I see the goals of the various fiscal policies in the package as falling into four categories:

  1. Boost short-term economic activity:  Increase purchases of goods and services (remember, GDP = Consumption + Investment + Government purchases (+ net exports)), above what would otherwise be the case.  This means as immediately as possible putting idle productive capacity to use–i.e., putting unemployed workers to work, getting shut-down plants going again, producing those new goods and services to meet new demand.  It’s with this demand-driven goal that the indirect strategies (transfer payments or tax cuts to households and businesses) are less likely to work as well as direct government purchases of goods and services, particularly if those indirect payments are not well targeted to households and businesses most likely to spend their new income on new goods and services (that they otherwise would not have bought).  Although aggregate GDP is easy to quantify, evaluating the effectiveness of the policy strategies toward the goal of immediately boosting GDP, all else constant, is not so easy.
  2. Assist American households who need that help the most:  Through safety-net spending programs (unemployment compensation, health insurance, food stamps, etc.) and tax cuts that are steered toward lower-to-middle income households, government can replace some of the lost income of households most hurt by this economic downturn.  For this goal in isolation, what the households choose to do with this assistance (whether they consume it or save it) doesn’t matter.  Even if a transfer payment is ineffective in boosting short-term GDP (because most of it is saved instead of leading to new purchases of goods and services), it will still boost the individual households’ economic well-being–and the welfare of society as a whole if one of the things we care about as a society is the well-being of the worst off in our society, or the distribution and not just the aggregate size of our economy.  Clearly, it’s easy to see which parts of the recovery package directly address this goal of assistance, but the value we place on this goal is not easily quantified in economic terms, as it does not show up in aggregate GDP.
  3. Promote longer-term economic growth:  Increase national saving and investment to increase our economy’s productive capacity (in contrast to the short-term goal of employing idle capacity already in place).  Fiscal policies toward this goal should encourage growth and improvement of the stock of physical and human capital, above what would otherwise be the case.  Building up a more productive labor force (healthier and better-educated workers) and a more productive physical capital stock (more efficient and sustainable technologies and infrastructure) will lead to a larger aggregate economy (higher GDP) over the longer term.  It’s with this supply-side goal that the deficit financing of policies makes those policies less likely to work, because the enlarged deficits represent negative public saving that offsets any increase in public or private saving that is otherwise encouraged by the policies.  (CBO’s macroeconomic analysis of the recovery bill highlights this point.)  As with goal #1, measuring what will have happened to the labor force, the capital stock, and aggregate GDP several years from now will be easy, but determining what difference the recovery package made will be difficult.
  4. Affect the mix of goods and services produced and how they are produced:  I see one of the goals of the recovery and reinvestment package as to intentionally change the allocation of resources in our economy–to encourage the production of goods and services, and the production methods, that improve the “public good.”  For example, policies that will directly purchase or indirectly encourage environmentally-sustainable technologies produce social benefits that exceed the private benefits to individual households or businesses.  The steering of our society’s resources toward these socially-beneficial activities thus can only be done by government and by definition (of an “externality” or a “public good”) would not otherwise be done by the private sector on its own.  A more adequate provision of these public goods that we have up to now underprovided (if that is our current judgment) necessarily implies a bigger government (as a share of our economy).  As with goal #2, the improvement in social welfare that would accrue is not something that is quantified in the traditional economic measure of aggregate GDP.

So the irony is that among these diverse goals that the policies in the economic recovery package are intended to address, those that are most likely to be achieved (#2 assistance and #4 increased public goods) are potential successes that will be the hardest to quantify.  And the goals that will be easiest to quantify through traditional economic measures (#1 short-term economic activity or “stimulus” and #3 longer-term economic growth) are still the hardest to evaluate in terms of policy effectiveness–and will be hard to evaluate even in hindsight.

In any case, I don’t personally see how the traditionally-favored, 8-years-failed, deficit-financed tax cuts of the Republicans (see today’s Washington Post story by Michael Shear and Paul Kane) do well on any of these goals.  Yet the murkiness of policy evaluation in terms of tax cuts and short-term and longer-term economic goals means we’re sure to be hearing “I told you so” from the Republicans for years to come, no matter what.

With Faith and a Prayer…

February 14th, 2009 . by economistmom

God\'s Stimulus Plan

I think the church down the street from me has it right.  Ultimately, government alone isn’t going to save us; it’ll take some divine intervention and a lot of our own, individual hard work and sacrifice.

Size Matters–But Quality Does, Too

February 13th, 2009 . by economistmom

Today Bruce Bartlett explains (in Forbes) that Republicans just don’t get it when it comes to fiscal stimulus–that when it comes to effective countercyclical policy, bigger deficits are better:

One reason why Republicans strenuously oppose the Obama administration’s fiscal stimulus plan is because it repeats the errors of Franklin D. Roosevelt. To them, the New Deal was mainly about vastly expanding government spending and deficits, which Republicans believe made the Great Depression worse rather than better. Therefore, doing so again in the present downturn will also lead to failure…

But in terms of fiscal policy, Roosevelt’s error wasn’t that he spent too much, but that he didn’t spend nearly enough…

The critics [of the New Deal] were also totally opposed to deficit spending. As with Republicans today, they said that federal borrowing would simply draw funds out of productive uses in the private sector to be squandered on make-work government jobs, pork barrel projects of dubious value and welfare programs that would sap the dynamism of the American economy.

Apparently, it didn’t occur to these critics that the existence of vast unemployment, closed factories, abandoned farms and extremely low interest rates meant that much of the private sector’s resources were simply idle. Borrowing them by running deficits didn’t reduce private output because there were no alternative uses available.

Furthermore, an expansive fiscal policy was essential to recovery because without it monetary policy was impotent and deflationary conditions continued…

Bruce then looks back at the historical data on GDP during the New Deal era and calculates what the “appropriate deficits” would have been, in contrast to what the actual deficits were; as he explains (my emphasis added):

In the table below, I have done a very simple calculation showing what fiscal policy should have been during the New Deal. I assume that the economy’s real productive capacity was at least equal to what it was in 1929 throughout the 1930s. The difference between the actual gross domestic product and what it was in 1929 I assume to be the output gap–a measure of idle resources.

Then I show the federal budget surplus or deficit and a calculation of how much the deficit should have been to compensate for lost gross domestic product. This required making an assumption about the multiplier effect–the number of times federal spending turns over as workers hired by government programs spend their earnings, thereby creating income and employment for other workers and so on…

Bruce’s table shows that deficits should have been maybe ten times larger than they were in the early 1930s, to close up that GDP gap.  My question is whether that’s really the “appropriately sized” deficit, and “appropriate” for what purpose?  For that fully compensates for lost GDP during the downturn (is full compensation, or a complete “filling up” of the economic hole, necessary or even desirable?), and it won’t necessarily even increase GDP in the longer term, once the adverse effect of higher debt (lower national saving) is accounted for.  (The Congressional Budget Office warns of the recovery package’s potential net adverse effect on GDP by as soon as five years from now.)

And Bruce explains why it took World War II to bring us out of the depression:

Ironically, Republicans implicitly acknowledge the truth of this when they argue that “the only thing that brought us out of the depression was World War II,” as Sen. John Ensign explained on Feb. 7.

Yet Republicans conveniently overlook the fact that it was massively larger budget deficits–which averaged close to 20% of GDP from 1941 to 1945–that were the principal contribution of the war to economic recovery.

But I have to wonder, without the convenient spending demands of a major world war (and this is not a reason to wish for war), can we come up with enough quality deficit-financed government spending to both effectively fill a lot of our current economic hole (reducing the output gap) in the short term and be “worth it” in terms of providing a net positive for our society (whether measured in GDP or broader notions of social welfare) over the longer term?

I still think that when we ask whether a massive amount of deficit spending makes us better off or not, it’s also the quality, not just the quantity, of the deficit spending that matters.  It’s still a question of whether the benefits are worth the costs.

Bipartisan Tax Reform

February 12th, 2009 . by economistmom

This morning I and three coauthors of diverse political perspectives released this paper on “Moving Forward with Bipartisan Tax Policy” (pdf version here).  We had a great turnout (and under Maya’s interpretation, not just because we served food); the audience was keenly interested in both the “bipartisan” and “tax reform” angles of our event, and we had engaging (and bipartisan) members of Congress speaking to them–Senator Ron Wyden (D-OR) and Congressman Paul Ryan (R-WI), who each have their own good ideas for how to reform the tax system.  From the introduction of our paper:

U.S. tax policy is urgently in need of reform. Our tax system is overly complex and has failed to keep pace with changing economic conditions. The current economic crisis has led to an escalating budgetary shortfall, which will exacerbate the already significant fiscal challenges facing the country. Moreover, looming changes written into the tax law will require Congress to make major decisions regarding the tax code. On December 31, 2010, most of the tax cuts passed in 2001 and 2003 (“the Bush tax cuts”) will expire. In the meantime, the Alternative Minimum Tax will fall on tens of millions more American families. And the federal estate tax is scheduled to disappear completely in 2010 before reappearing in 2011. If these changes were permitted to take effect, which is unlikely, they would lead to sudden and significant changes in effective tax rates, after-tax wages, returns to capital, and the distribution of the tax burden. Congress needs to act, not simply to move towards a more stable tax system but to create a tax system adequate to the demands of the twenty-first-century economy…

Regardless of whether the tax cuts are extended, the gap between spending and revenues is projected to increase dramatically in the coming decades due to the effects of an aging population and rising per capita health care costs. Whatever disagreements there may be between those on the right and those on the left about the appropriate size of the federal government, the “correct” level of revenues is that which adequately covers the cost of government spending programs—if not year by year, then over the longer run. The unavoidable economic costs of raising revenue can and should be minimized by creating a tax structure that tries to minimize inefficiencies…

Although the authors of this paper have divergent viewpoints as to the appropriate role and size of government, we agree that the current tax system is inadequate: it raises revenue inefficiently and is not well equipped to handle the challenges of the twenty-first century economy. We agree that the federal government should take the following steps: 

  • Create a more transparent and straightforward tax code
  • Promote saving by shifting toward a progressive consumption tax
  • Rethink tax expenditures
  • Update U.S. business income taxes
  • Implement an environmentally motivated tax policy 

We believe that a productive discussion of tax reform must start where tax and budget policy considerations intersect. We agree on a number of changes that should be made to the tax code to improve its efficiency and transparency. And, most importantly, we believe tax reform has to be undertaken on a bipartisan basis if it is to be politically acceptable, economically sensible, and long lasting.

As I said in my remarks, for policymakers to be able to come together on tax reform in a truly bipartisan manner, each side will first have to let go of some of their own misconceptions about tax policy.  Republicans will have to realize that not all tax cuts promote economic growth and that contrary to their small-government philosophy, many tax cuts are truly just government spending in disguise; tax expenditures grow government just like any other spending, by requiring that taxes be raised elsewhere to cover their cost.  Republicans will also have to get out of their rote “permanently extend the Bush tax cuts” box.  Democrats will have to realize that while promoting social goals through tax expenditures may seem like the politically most convenient strategy (because the Republicans are less likely to recognize it as “spending”), it is often not the most efficient way to target such spending and typically encourages a benefit pattern that is relatively more generous to higher-income households (i.e., is “regressive” in incidence).  And (my pet peeve) I believe Democrats will have to be willing to not just complain about the unfairness and unaffordability of the Bush tax cuts but actually have the guts to call for (or just allow) their expiration.

How to Spend and Save at the Same Time

February 11th, 2009 . by economistmom

David Leonhardt has a nice column in the New York Times today, explaining how this is possible–that the government could actually get us to spend more (for stimulus in the short term) and save more (for growth over the longer term):

It’s your fault. Part of it is, anyway. You, the American consumer, spent too much money. You bought too much house, took on too much debt and generally lived beyond your means. Your free-spending ways helped cause the worst financial crisis since the Great Depression.

And now you’re going to have to do your part to end the crisis. How? By spending. Enough already with the saving that many of you have suddenly begun doing. This very moment, Congress and President Obama are preparing to send you a tax rebate, to inspire you to stimulate the economy. So go out and stimulate. Spend as if the future of your country depended on it.

John Maynard Keynes, the great 20th-century economist, would have appreciated the apparent absurdity in these mixed messages. He coined a phrase, “the paradox of thrift,” to point out that what was rational for an individual during hard times — saving money — could be ruinous for an entire economy. Eventually, many of the savers may end up out of work because everyone else is saving, too.

It’s enough to make you wonder what exactly you’re supposed to do. At his news conference on Monday night, Mr. Obama was asked directly whether people should spend or save their rebate checks. He ducked the question.

Fortunately, though, it has an answer. There are a few ways to help both your own finances and the country’s.

The first involves figuring out how to spend money now to save money later — which can lift the economy today and help individual households cope with their battered finances in the long run. The second involves realizing that Keynes’s paradox isn’t ironclad. In a financial crisis, when banks may need capital as much as retailers or restaurants need business, many people can save without guilt…

David explains that it’s not that we’re already proficient at this “saving” thing (what I’ve called “living within our means”).  It seems to run against our American nature:

Psychology-tinged economics — that is, behavioral economics — has taken off over the last two decades, and one of its central findings is that most people do not do a good job of planning for the future. They aren’t nearly as nice to their “future self,” as economists say, as to their “present self.”

They eat just one more doughnut and put off exercising until tomorrow and tomorrow and tomorrow. They fail to set aside enough for retirement. Again and again, they choose a bird in the hand — be it dessert, convenience or a little extra cash — over three or four in the bush.

And he provides some great real-world examples of how to do it–this spending and saving at the same time: 

A programmable thermostat, which adjusts the temperature when people are out of the house or asleep, can cost as little as $50. For less than $1,000, people can buy the thermostat, as well as hire a contractor to fix leaks and replace their light bulbs with more efficient ones. In either case, the spending often pays for itself in just a year or two.

“There is a difference between consuming and investing,” says Ken Ostrowski of McKinsey. “And energy efficiency falls more into the category of investing.”

I asked behavioral economists for some other examples, and they helped me come up with a nice little list. Parents of young children can join Costco and make up their membership fee with just a few months of diaper purchases. Drivers can inflate their tires, change their air and fuel filters and start getting better mileage. Frequent book buyers who don’t mind screen reading can buy the new Kindle. It costs $359, but most new books then cost less than $10.

Families who shop at rent-to-own stores, which charge ridiculous interest rates, can temporarily pare back and then buy furniture or electronics outright…

Well, just make sure you don’t charge these wise purchases on a high-interest credit card–lest you sabotage that “paying off over the longer run” goal.  Borrowing the money to purchase those wise investments only makes sense if the return on the investment exceeds the interest rate paid.  Otherwise an otherwise good investment (in and of itself) becomes a bad, deficit-financed investment.  It gets back to the basic principle:  don’t buy stuff you cannot afford (even if they’d be smart purchases for people who can afford them).

And this idea of spending now being ok for even the longer-term outlook, as long as there’s likely to be an eventual payoff even net of any financing costs (if deficit financing is even necessary) applies to the recovery package as well:

The ideas here don’t apply only to individuals, either. They apply to the stimulus package as well. The federal government is set to spend $800 billion to stimulate the economy. Much of that money will necessarily go to tax rebates, unemployment benefits and other programs without much long-term benefit. But $800 billion is a lot of money. And the best forms of stimulus are the ones that take effect quickly and bring a long-term payoff. That can mean tax credits for home weatherization or money to pay for the installation of computerized medical records — two programs that are still in the stimulus bill.

Let’s hope we know what we’re doing in pursuing this massive amount of deficit spending in the name of not just short-term stimulus, but also longer-term “reinvestment.”  For those policies and projects encouraging longer-term economic growth to pay off, on net after the compounding interest costs associated with the added debt, these (re)investments, based on their own merits, are going to have to pay off big time.

Better Than Nothing?

February 10th, 2009 . by economistmom

Apparently today’s news on the $1.2 trillion (or so) worth of government action on the economy wasn’t what investors wanted to hear.  From CNN-Money:

Stocks slumped Tuesday, with the Dow industrials ending at a 3-month low, as the government’s bank rescue plan failed to reassure investors burned by the 14-month old recession…

The TARP announcement “was a huge disappointment,” said Stephen Stanley, chief economist at RBS Greenwich Capital. “There’s been an incredible buildup for weeks and then they release a plan that has little in the way of details.”

Stocks slipped leading into Geithner’s late-morning speech and accelerated after he finished outlining the plan…

After much debate, the Senate passed its $838 billion economic stimulus bill Tuesday afternoon by 61 to 37. Now leaders will need to negotiate a final bill with the House, which already approved an $819 billion version of the plan two weeks ago. (For details, click here.)

Enthusiasm about the economic stimulus has waned in the weeks since it was first proposed.

Investors also considered Federal Reserve Chairman Ben Bernanke’s prepared testimony before a House committee. Bernanke said the central bank’s efforts to increase liquidity are “no panacea” to the credit crunch. Yet he also said that the Fed’s actions are easing the strain…

“I think there was some hope, maybe unreasonably so, that the administration was going to come out with a plan that wouldn’t solve all our problems, but would at least help,” [economist Stephen Stanley] said. “That may very well still happen, but we didn’t see it today.”

Is this particular more-than-a-trillion-dollar installment not clearly better than nothing?  Uh oh.

Nobody Gets Everything

February 9th, 2009 . by economistmom

Senator Arlen Specter (R-PA) explains in today’s Washington Post why he supports the ”stimulus” (and yes, he still calls it that).  He tries to make the case for both immediate action and a “paring down”–versus a “piling on”:

I am supporting the economic stimulus package for one simple reason: The country cannot afford not to take action.

The unemployment figures announced Friday, the latest earnings reports and the continuing crisis in banking make it clear that failure to act will leave the United States facing a far deeper crisis in three or six months. By then the cost of action will be much greater — or it may be too late…

The legislation known as the “moderates” bill, hammered out over two days by Sens. Susan Collins, Ben Nelson, Joe Lieberman and myself, preserves the job-creating and tax relief goals of President Obama’s stimulus plan while cutting less-essential provisions — many of them worthy in themselves — that are better left to the regular appropriations process…

[T]his proverbial half a loaf beats no loaf by a mile…

And he even quotes President Kennedy as if to remind his Senate and House colleagues that this is how political “compromise” used to work:

“In politics,” John Kennedy used to say, “nobody gets everything, nobody gets nothing and everybody gets something.” My colleagues and I have tried to balance the concerns of both left and right with the need to act quickly for the sake of our country. The moderates’ compromise, which faces a cloture vote today, is the only bill with a reasonable chance of passage in the Senate.

And sure enough, this evening’s news is that a ”compromise” version of the Senate bill will indeed be the version up for a vote tomorrow (Tuesday).  But it’s even a bit more costly than the House version, and the two versions remain far apart in substance (the Senate version being much heavier on tax cuts and lighter on spending than the House version):

This evening’s vote was on a substitute bill negotiated late last week by a group of Democrats and moderate Republicans. Three Republicans ended up breaking with their party leaders to support the compromise, but that was enough to give the bill’s Democratic backers the 60 votes they needed to cut off debate and avert a filibuster.

The architects of the compromise — notably Sen. Ben Nelson (D-Neb.) and Sen. Susan Collins (R-Maine) — said they trimmed the stimulus package from more than $900 billion to $780 billion in an effort to attract bipartisan support. But Republicans said that when amendments passed last week were included, the package came in at around $827 billion. They denounced the alternative as still too expensive, unfocused and unlikely to work.

In addition to Collins, two other Republican senators voted for the bill this evening: Sens. Olympia Snowe (Maine) and Arlen Specter (Pa.). All Democrats voted in favor of cutting off debate…

So it remains to be seen when the House and Senate work out a “compromise” between them on this package, will they remember that “nobody gets everything”–or will they continue the business-as-usual “piling on”?

Living Within Our Means: Kevin Hassett Romance Edition

February 8th, 2009 . by economistmom

Today conservative-leaning economist Kevin Hassett advises on romance in the Washington Post.  Yes!  (And I thought that his writing about polar bears was unusual!)

I absolutely love Kevin’s column, focused on the rituals of finding one’s “true love”–because his bottom line (as I read it) is that constraints matter in forcing us humans to make the best choices…which reminds me about fiscal policy debates, of course.

First, Kevin explains how the traditional way people find their mate, with men doing the courting (passing), and women doing the accepting (receiving) probably works out better for the men than the women:

A matching game that proceeds with men signaling their interest and women choosing from among their suitors seems as though it gives women the power. But in fact, it does the reverse. Since each man proposes to the women starting with his most favorite and continuing through lesser choices, he is eventually matched with the woman who is his most favorite among the set of all women who would have him. The opposite is true for the women, whose most favorite men may not ever even propose to them.

The problem with this traditional approach is that the women don’t get a chance to “signal” who those “most favorite men” are.  (Or as an (unromantic?) economist might put it, the “prices” women are willing to pay for these men are not revealed, because the women are not allowed to “bid.”)

Then Kevin explains how this applies to modern-day matchups:

A well known example in the economics community illustrates the function of such signals. Muriel Niederle is a renowned game theorist at Stanford. The dating Web site Cupid.com recently asked her to help solve a common problem: Women were being inundated by offers from men, which made it difficult for them to find good matches.

Niederle offered up a solution: Cupid.com should give each man two electronic roses per month to send to two women of his choice, along with an introductory note. Since the men were only allowed to send two roses, women found that they were choosing from a much better and smaller pool of candidates. Cupid.com chief executive Eric Straus told the Wall Street Journal that this approach improved a suitor’s chances of success by 35 percent. This simple insight, of course, only replicates in electronic form the ritual that males of many species have followed since the dawn of time. A costly gift is a valuable signal.

In other words, constraints matter.  They force us humans to figure out and signal what’s most valuable to us.  They narrow down our choices so that we’re more likely to come up the best options–our best match.  On Cupid.com “paring down” is a better strategy for finding one’s “true love” than “piling on.”  This, in my (economist) mind, applies to fiscal policy decisions, too…

And Kevin even concludes with a policy prescription:

Which brings us to Valentine’s Day.

When I was very young, it was the practice at school for each child to give a valentine to all his classmates. Since everyone received a valentine, they provided no signal. Given our age, that was irrefutably a good thing. As we grew older, valentines dwindled and disappeared. As adults, it seems that most people who receive valentines have already found their matches.

But if you consider how difficult matching is, then you have to conclude that Valentine’s Day has become an enormous missed opportunity. People have an almost impossible task in finding a mate. Society can do a better job of providing opportunities for them to signal interest in one another. We can start with Feb. 14. If every unattached person selected a few individuals they might be interested in and sent them a valentine, the literature suggests that it would significantly improve the quality of matches, just as a simple electronic rose launched thousands of Cupid’s online arrows.

In addition to smoothing the matching process, a Valentine’s Day revival would have a second effect. If both sexes signaled equally, then the whole process would no longer be slanted in favor of men…

Valentine’s Day is next Saturday. Get moving. You still have time to send a few valentines.

I have a feeling that Kevin might actually encourage an unusual number of economists to unusually send an unusual (but selective) number of valentines this year.  How romantic!  ;)

The Senate Pare-Down?

February 7th, 2009 . by economistmom

All that “bipartisan compromise”…just to end up with a recovery package just as large as the one that came out of the House. This morning’s (Saturday) Washington Post reported (based on news as of Friday evening):

[Republican Senator Susan Collins] called the Senate legislation “a considerable improvement over the House-passed bill,” which she described as “loaded, expensive and ineffective.” The new version, she said, “will help Americans throughout this country who are struggling because they lost their jobs.”…

The Senate changes bring what had been a $920 billion package down to about $820 billion. [The House-passed bill costs $819 billion.] Among the largest cuts: $40 billion from a $79 billion fund aimed at helping states preserve school funding as they try to balance their budgets. And negotiators cut in half $15 billion in “incentive grants” for states that meet certain goals for their initial education allotment…

Other (fresher) stories suggested the bipartisan group had reached a lower figure of $780 billion.  CQ reported on Saturday afternoon that:

The exact cost of the compromise remained somewhat in flux as the Senate engaged in three hours of debate Saturday and Democratic leaders put the finishing touches on legislative language. While the revised plan released Friday night carried an estimated cost of about $780 billion, amendments adopted during Senate floor debate are likely to push the total cost past $800 billion. Those additions include a provision sponsored by Johnny Isakson, R-Ga., that would create a $15,000 tax credit for homebuyers.

But both news sources made it clear that what the Senate had done was first added about $100 billion in tax cuts to the House version, then taken away nearly $100 billion in spending programs, setting Congress up for a conference battle between House and Senate that’s not going to be easily resolved–or at least not likely to get resolved without pushing the cost right back up to that $900+ billion level.  CQ describes the Senate pare-down:

At the behest of moderates, the Friday night compromise shaved about $108 billion from the original Senate proposal. Appropriators cut $83 billion in discretionary spending from the Senate plan, including funding for school construction and other programs favored by Democrats in the House and Senate. The Finance Committee pared back health care spending provisions by $7 billion, and scaled back the tax cut package by $18 billion.

In other words, spending was cut by $90 billion and tax cuts by just $18 billion.  And the Washington Post describes the trouble with that (deficit-financed) AMT relief that the Senate added:

Negotiations with the House could also dramatically alter the package. While the bills in the two chambers are now likely to be similar in size, the Senate has increased the percentage of its legislation devoted to tax cuts. The biggest change is the addition of a $70 billion provision that would protect more than 24 million families from the alternative minimum tax.

House moderates oppose including the AMT provision in the stimulus package, arguing that the issue should be addressed in the regular budget process so that its cost can be offset by spending cuts or tax increases…

With AMT in and some of House Democrats’ top spending priorities out, the package could become much more difficult for many House members to swallow, Democratic aides said. House Majority Leader Steny H. Hoyer (D-Md.) said House Democrats will push hard to restore the Senate’s deletions. That means, lawmakers said, that the overall cost would grow to around $900 billion to accommodate the AMT fix.

In other words, forget this bipartisan “paring down” exercise.  Sounds like we’ll be back to the usual “bipartisan” “piling on” business soon, when the recovery bill heads into House-Senate conference negotiations.

Tax Cuts Off the Table (Once Again)

February 6th, 2009 . by economistmom

The Washington Post reports on President Obama’s rally cry to Congress to work things out on the recovery package.  The sticking point in the Senate seems to be the perception among centrists that there’s too much in the package that is not effective as true, short-term “stimulus”:

As debate resumed on the Senate floor, a bipartisan group of nearly 20 moderates kept trying to hammer out a compromise that would attract more Republican support by cutting roughly $100 billion from the bill.

But President Obama seems to want the total package to stay just as big as it–around $900 billion:

Obama said that the House and Senate versions of the economic recovery package can still be improved and refined and that some provisions may need to be dropped and others added.

“But broadly speaking, the package is the right size; it is the right scope; it has the right priorities to create 3 [million] to 4 million jobs and to do it in a way that lays the groundwork for long-term growth,” he said.

Well, I’ve seen the list of the pieces of the package that would potentially end up on the cutting room floor, and it’s no wonder why it’s been hard for the Senators to find much savings (my emphasis added):

In their talks last night, the group of Democratic and Republican senators failed to reach agreement on which programs to trim. Instead, as the chamber has debated the bill this week, its cost has grown by almost $40 billion, with the tab now at more than $920 billion.

Reid said yesterday that he would allow the centrist, bipartisan group to continue working and that, if it reaches consensus, he would schedule a vote for today on final legislation. If that fails, he said he would call for a rare Sunday session for a key procedural vote that would require 60 votes for passage…

“It’s very difficult, because everyone has certain pet programs in this bill,” said Sen. Susan Collins (Maine), the leader of the Republican faction in the bipartisan group. “We’re trying to focus it on spending that truly helps stimulate the economy. People have different views on whether or not a program meets that test.”

Collins is one of three Senate Republicans whom Obama hosted at the White House this week for one-on-one sessions in an attempt to win their support. She told reporters yesterday that he agreed to her effort to reduce the overall cost of the package to $800 billion. That would require dramatic reductions in funding for popular items such as school construction and special education

The House approved an $819 billion package last week, but the Senate has added more than $100 billion in tax cuts to its version of the legislation, which started at about the same figure as the House measure. Efforts to reduce the cost of the Senate bill are not focused on those tax cuts, but on parts of the more than $550 billion in spending that House and Senate Democratic leaders originally sought.

Two sticking points for Republicans were funding for school construction and Head Start, both viewed as worthy programs but not ones that would provide a sufficient boost to the economy…

So tax cuts are off the table, given a “bye” in this test of whether proposals meet the criterion of effective (high “bang per buck”) short-term economic stimulus.  Note that the list of untouchable tax cuts in the recovery package includes the $70 billion for Alternative Minimum Tax relief alone–which the Tax Policy Center grades as a “D-” in terms of its “stimulus effect,” saying it’s “neither timely nor targeted” and “makes no sense as economic stimulus”, and which economist Mark Zandi says has a multiplier (”bang per buck”) effect of less than half a dollar per dollar spent–one of the most ineffective forms of stimulus he has considered in his analysis.  Meanwhile, Zandi’s analysis clearly shows that infrastructure spending is one of the most direct and effective ways for the government to stimulate the economy (immediately boost GDP and create jobs).  So why is cutting out any tax cuts off the table?  Because tax cuts sound like they lead to smaller government and have broader benefits than construction projects to modernize particular schools, even if that school construction would actually create more jobs than AMT relief will (especially per dollar spent).  And because no politician, even those Democratic politicians who favor spending programs over tax expenditures, likes to be on the record opposing a tax cut (or favoring a tax increase that would pay for other tax cuts or government spending).

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