The “R” Word and an Economic Stimulus Plan

The dreaded “R” word—recession—is in on the tip of many tongues right now. Are we in a recession? Far be it from me to trespass on the sacred territory of the official keepers of economic data in Washington—those who officially decree the onset or end of a recession (although not until months after the fact)—but take a look around.

New home construction has declined nearly 25 percent in the last year. Those employed in the construction industry must feel like they are in a recession. Home sales have plummeted. Lots of real-estate agents are experiencing their own recession. In southeastern Michigan, the auto industry is doing so poorly that it feels more like a depression. Nationwide, not only are there record home foreclosures, but delinquency rates on auto loans and credit card debt are increasing at a worrisome rate. Retail sales are down modestly year over year. If this isn’t a recession, it sure seems like one.

So, what is a politician to do when confronted by these disquieting economic conditions in January of an election year? Ride to the rescue, of course. Thus, on Thursday, January 17, Federal Reserve Board Chairman Ben Bernanke appeared before a congressional committee to appeal for an “economic stimulus” package. The very next day, President Bush and Treasury Secretary Hank Paulson echoed Bernanke’s remarks. Obviously, this was a tightly coordinated political operation, with Bernanke having been chosen to make the opening gambit. (Yes, the Chairman of the Fed is supposed to be apolitical. Climate science is supposed to be apolitical, too, but in Washington, EVERYTHING is political.)

The stated purpose of an “economic stimulus” package is for Uncle Sam to use fiscal policy (that is, government’s taxing and spending powers) to “juice” economic activity in order to mitigate, shorten, or prevent a recession. In the present case, President Bush has proposed tax rebates to individuals and tax incentives to businesses to invest, expand, and hire more workers. Will it work? I doubt it.

I will concede that some businesses will benefit from various tax breaks, although such measures are unlikely to help the businesses that need relief the most, such as the real-estate sector. More importantly, though, these business tax breaks raise issues of fairness. Just as recent legislative proposals to bail out holders of adjustable rate mortgages is unfair to Americans who opted for fixed-rate mortgages, so giving tax breaks to businesses for upgrading their equipment this year is unfair to their competitors who upgraded last year. On the other hand, the bipartisan willingness to accept such tax incentives is evidence that current legislators understand that taxes cripple the competitiveness and hiring ability of American companies. This raises an important question: Why don’t they permanently reduce such harmful taxes?

The lion’s share of the stimulus package will be in the form of rebates to individual taxpayers—up to $800 per person in Bush’s proposal. The impact of this policy is likely to be inflationary. After all, if Congress has the U.S. Treasury send out tens of billions of dollars to taxpayers to spend, and doesn’t reduce its own spending—which it won’t—then we will instantly have a huge increase in total spending chasing after an unchanged supply of goods and services. Presto, inflation! And if the Treasury disgorges all those billions to taxpayers, where will it get the money to continue federal spending unabated? It will either have to go deeper into debt—debt for which the taxpayer will be liable—or their friends at the Federal Reserve will have to print more money. Wouldn’t that be just what the doctor ordered now that prices are already rising?

So, what are the odds that such a dubious economic policy will be adopted? About 100 percent. Bernanke wasn’t even finished speaking on the 17th before congressmen from both parties immediately tripped over each other in their haste to endorse a stimulus package. With equal haste, presidential candidates—all vying to take George Bush’s place as the next Santa Claus-in-Chief—unveiled similar stimulus plans. And who will oppose such largesse? A few principled individuals may demur (expect Ron Paul to vote “no” when it comes before Congress for passage) but there will be no public outcry against such a proposal. How many Americans are going to plead to Congress, “Please don’t send me one of those $800 checks?”

Other than the details, it’s a done deal. Can $800 apiece halt the decline in home prices, get Americans out of debt, revive the domestic auto industry, or recapitalize financial institutions that have suffered multi-billion-dollar losses? I don’t think so. Politically, an economic stimulus package may buy a few votes this fall, but economically, it’s essentially worthless.