Outside editorial: The $150B gamble

Posted: Thursday, January 31, 2008

In Washington, the most fundamental debate in dealing with any problem is not over whether to do X or do Y. It's whether to do something as opposed to doing nothing. Nothing is often the shrewdest, safest and cheapest approach. But elected officials generally take the view that any action is preferable to none. Which explains the sudden consensus for a fiscal stimulus package.

Last week, President Bush and House leaders agreed on a $150 billion plan that will provide rebates and business tax breaks that are supposed to give a shot of adrenaline to a sluggish economy.

Individuals would get $300 to $600 and couples would get up to $1,200, plus $300 for each child. Businesses that invest in new plants and equipment would be able to write off an extra 50 percent of the cost in the first year. And the government-sponsored mortgage companies known as Fannie Mae and Freddie Mac would be allowed to buy mortgages as big as $729,750 on single-family homes, up from the current limit of $417,000.

The best you can say for this plan is that it could be worse. It at least avoids such time-honored steps as pouring money into public works programs that would be hard to justify on normal cost-benefit criteria. It provides rebates even to people who don't pay federal income taxes, which is the group most likely to spend the money and thus boost total demand.

But $150 billion is a huge amount to risk on a gamble that fiscal policy can turn the economy around - particularly when the Federal Reserve, which can move much more rapidly and effectively, has taken aggressive steps to avert a recession and stands ready to do more if necessary.

As it happens, getting Americans to spend money is not as easy as you might think. The last time the government sent out rebate checks, in 2001, recipients spent only two-thirds of the windfall, on average, and took six months to do so.

Other practical obstacles loom. One is getting the Senate to sign on without demanding changes that would delay action. In addition, the Treasury Department says that once a package is enacted, it will need two and a half months to get the first checks out. The Congressional Budget Office says it will take even longer. Between delays in mailing the rebates and delays in spending them, says CBO director Peter Orszag, the rebates "would affect spending at the end of 2008" - not a triumph of timing.

If the goal is to get money circulating rapidly, it's hard to justify giving rebates to people well above the average income (couples earning as much as $150,000 will qualify for the maximum rebate). They are the most likely not to spend the money but to save it.

The business tax incentives recognize that capital spending as well as consumer spending can help the economy. But it's not clear how much good they would do. Robert Carroll, who recently stepped down as deputy assistant treasury secretary for tax analysis, told CQ Weekly that the last bonus depreciation, back in 2002, "probably wasn't as effective as it had been hoped."

As for the higher loan limits for Fannie Mae and Freddie Mac, they could help to reassure mortgage lenders at a time when they are nervously pulling back. But they also increase the risks for two companies that Congress might feel compelled to rescue from any resulting default - at the expense of taxpayers. And after the reckless mortgage binge of recent years, it's probably a good thing for lenders to pull back a bit.

Can our leaders be persuaded to restrain themselves from an expensive intrusion that may do no good? Probably not. But chances are the chief benefit of this program will be to confirm the wisdom of doing nothing.

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