Features > February 11, 2008

Escape From Recession

What you should know about the economic stimulus package

By Jared Bernstein and Lawrence Mishel

We hate to fulfill the stereotype of dismal scientists, but the news is bad: The economy is slowing sharply and may be in recession. The nation’s broadest measure of growth, real gross domestic product (GDP), grew a scant annual rate of 0.6 percent at the end of last year. Unemployment has risen, and job growth has slowed sharply. The housing market has yet to hit bottom, and credit markets are still deeply chilled, if not frozen.

Here’s the better news: When this type of scenario develops, the case for an economic stimulus package to offset the downturn is both simple and widely accepted. But there are many ways to craft a growth package, and if we don’t get this right, we risk wasting big money while failing to mitigate the pain of recession.

As In These Times went to press, both chambers of Congress had passed bills, and their ratification looked all but certain. (President Bush had signed off on the House bill, and had agreed to support the Senate’s package after it had been signifcantly scaled back.) The bills spend about $150 billion this year and next on a combination of “tax rebates” (though that’s really a misnomer) and business tax cuts.

Will that be good enough? Here’s a Stimulus 101 primer, as well as a list of what we think is missing from the current economic recovery plan.

The basics

Economies depend on robust demand. When folks stop buying, when investors leave the room, when governments stop building and improving public goods, growth grinds to a halt. And when that happens, the job machine stalls, unemployment rises, those with jobs work fewer hours, wages rise more slowly, and incomes decline, especially for the lowest earners and many minorities.

The last two recessions—in the early ’90s and early 2000s—led to declines in the typical family’s income by about $2,500 (in today’s dollars). That ain’t peanuts.

Such a potential income loss is especially worrisome now, as the inflation-adjusted median family income actually remains about $1,000 below where it stood in 2000. If recession is imminent, this would be the first time that real incomes at the end of a recovery have not exceeded those at the previous economic peak.

That fact might be the greatest indictment against Bushonomics and the “ownership society” he touted. It is a stark reminder that while the stimulus appropriately targets a short-term problem, the mechanisms that serve to fairly distribute income have been broken for some time. Most families in the United States have not fared nearly as well as they should have, given their contributions to the growth we’ve experienced. The coming slowdown will only submerge them in deeper water.

That’s what makes fiscal stimulus so necessary. By fiscal stimulus, we mean a temporary infusion of expenditures into the economy by the federal government to raise demand. The infusion necessarily takes the form of some combination of a reduction in taxes and spending increases.

We’ve also got more time than we think. Each of the last two recessions was short (eight months) in GDP terms, but far longer in terms that matter most to most people: jobs and unemployment.

Unemployment rose for 19 months after November 2001, which was the official end of the last recession, and employment declined by another 1.1 million and did not start growing until September 2003. Had an effective stimulus package come late in the game, as officially measured, it would have helped shorten what turned out to be the longest jobless recovery on record.

Current proposals

The president and the House agreed on a stimulus package that spends about $100 billion on personal tax rebates and $50 billion on business, by allowing them to depreciate new investments faster than usual, and thereby pay fewer taxes. (Firms can deduct the cost of depreciation from their income to lower tax liabilities.)

The package has some pluses, but it could have been much improved. Thanks to negotiations by House Democrats, $28 billion more of the rebates will reach 35 million more low-income persons than were included in the initial White House package. Under Bush’s original plan, only 8 percent of the rebate made it down to the bottom 40 percent. It’s now 21 percent. That gets money to folks who need it, but also helps because those folks will spend the money (rather than save it) and generate more demand.

But the bonus depreciation for businesses is a particularly ineffective form of stimulus. For each dollar of tax revenue we sacrifice in this way, we get back a measly 27 cents in new demand, according to economist Mark Zandi. Of the 13 types of stimulus Zandi tested, this one was the worst. (Making the Bush tax cuts permanent was, at $0.29, a close second.)

This package, while costing 1 percent of GDP, could boost the economy by less than 1 percent, perhaps around 0.75 percent. That’s unacceptable. We should get at least 1-for-1. Any stimulus worth passing should get back at least as much in GDP terms as it costs, and even that’s a low bar.

The Senate’s plan is a little better in this regard. While spending about the same amount on rebates, it gets them to even more low-income people. (Seniors dependent on Social Security were left out of the House plan.) But Senate Republicans blocked its originally proposed 13-week extension to unemployment insurance (beyond the normal 26 weeks), which offered a strong bang-for-the-buck: A dollar spent here gets you $1.64 in stimulus. The reason is simple: People unemployed long-term need money and spend money. That’s not always the case with rebates.

What’s missing

One thing the current stimulus package got right was making payments to individuals. But these are not “tax rebates,” which implies that the government is returning taxpayers’ money to people who overpaid their taxes. Rather, these are checks provided to people in the expectation that they will spend the money on goods and services.

Why is that helpful? Because as they spend these payments, they create demand. For instance, when you buy items at Costco, the store will restock its shelves and re-order goods from its suppliers, a process that maintains employment and wages being paid and spent, all of which boosts the economy. But, to energize the economy, these payments have to be spent, not saved. Better yet, they need to be spent on domestic items, as imported goods stimulate another country’s economy.

When the payments are spent domestically, their impact reverberates throughout the economy. The sooner income-constrained households receive these checks, the sooner these payments will help both the recipients and the larger economy, thus achieving the dual goals of both fairness and effectiveness.

However, failing to extend unemployment insurance was a big mistake. Such payments have the greatest probability of being spent, and the unemployment insurance system needs to provide a better safety net for low-income, part-time and other workers. Temporary improvements in food stamp allocations and greater assistance for energy bills would also have a similar positive effect.

Providing payments to state and local governments (for their Medicaid costs or otherwise) would also have helped mitigate rising unemployment. Downturns cause state revenues to fall and spending to rise, especially when they originate in housing markets. That’s because, as more people need assistance, public programs kick in. But when states need to balance their budgets, they often respond by raising taxes, cutting services and laying off workers—slowing down the economy even more. It’s necessary for the federal government to provide relief for the states to forestall these desperate moves.

Finally, though it’s received scant attention, one of the best things we could do is put Americans to work building or repairing needed infrastructure. Jobs spun off by these projects put goods in the pockets of workers who would otherwise struggle, and the improvements in roads, bridges, schools and sewage treatment facilities can lead to higher productivity, better health and better education. Given the depreciation of our public infrastructure, these efforts only accelerate what we need to do anyway. To be timely, we should invest in projects that are planned or underway, but strapped for resources due to the slowdown. Another advantage is that none of such spending is “saved”: While citizens may spend less than two-thirds of the payments made to them, governments spend all the money.

Though a recession has not officially been called, polls show that most people think we’re already in one. While this may be a head-scratcher for those focusing on GDP and financial markets, it’s clear to us that too many families have been economically squeezed in recent years, even in good times. Imagine what they are likely to face in bad times.

Our political representatives had every reason to quickly pass a package to jumpstart our slumping economy. But they didn’t get it completely right. It’s up to us to make sure they do.

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• Reader Comments

  A lot of truth and good ideas here, but they do not address the underlying causes of our current predicament � this long downward spiral was brought to us by political ambition and corporate greed.

  Economic terms like Free Enterprise and Free Markets, Competitive Advantage along with promises of the benefits of cheaper consumer goods though Globalization have been perverted by those in power.

  Skewed statistics and short term comparisons have ignored and avoided admitting the evaporation of our middle class and the shrinking of freedom which comes with the selling of our best jobs. Here again misrepresentation helped sell the idea by claiming to lift the foreign workers to our level as if the syphon would remove nothing here.

  The current “stimulus” is the equivalent of giving the man with a hangover a bit of hair of the dog that bit him.

  Since the fall of the Soviet Union left us with a “peace dividend” I have tried to convince candidates in each election year to create jobs, cut emissions, and save lives by adding an Interstate Passenger Rail System to our existing Interstate Highway Systemt. The response from my own representative was a form letter touting his voting record on pork projects in construction. Nothing from any candidate.

  Post 9/11 was a perfect time to initiate such a massive project to ease our dependence on foreign energy sources and provide an emergency evacuation mode in case of man-made or natural disaster. As usual our “leaders” response was piecemeal, expense and wasteful.

  The current government approach is more of the same which brought us to the sad state of affairs.
  
  At 70 life is all reruns.

  Posted by whattheheck on Feb 12, 2008 at 9:00 AM

  The jobs created to repair and build infrastructure is an excellent idea,very reminisant to FDR’s CCC program.Alot of people were put to work and alot of much needed and beneficial projects were completed.
  I do like the idea of poster whattheheck on the inter-state passenger rail system.Our rail system in this country is a total mess.The problem is that the railroads say that they were losing money,hand over fist in the past,which is why they pretty much dismanteled the passenger rail service in the continental U.S..

  Posted by eddiemyboy1 on Feb 13, 2008 at 9:50 PM

  I too support income protection for workers and improved unemployment benefits. But I would feel better if there was also a discussion of the value of the American Dollars and almost the same thing, the value of the U.S. debts. Are these limiting factors or does stimulus create improved revenues that offset the problems with U.S debts?

  Posted by natriley on Feb 14, 2008 at 3:05 PM

  Too many folks in East Texas, the richer ones that is, see any Government aid as welfare for the minorities. They want to see a Tax Code that takes the same amount from a minimum wage worker as it does from a multi-millionaire. Not same percentage, same amount. That would only be fair in their warped thinking.
  Anybody who doesn’t have a substantial savings account is a wasteful spender. Just as all worker’s should have taken a job with a high pay scale and great benefits. The fact that there aren’t that many of those jobs to be taken is beside the point.. One wit was against any teacher pay raises because they knew what the job paid and shouldn’t expect any pay raises. ‘Course he expected a pay raise and a bonus every year, but that is different. That is what my late wife used to say when she was in the wrong about something.
  We cannot expect anyone born with a silver foot in their mouth to have a clue as to how to manage an economy as diverse as ours is. Especially when he only takes advice from folks who only want to have it all for themselves.
  Most that I have talked to have said that any rebate or stimulus check they get will go into savings, against a rainy day.
  Me, I am on Social Security (less than $9600/year) with a gross income (net was less than $1000) last year of $2100. Thats two zeros, not three. So that lets me out of getting any check. But hell, when a man can make that kind of money, he don’t need any help, right?

  Posted by farmer on Feb 15, 2008 at 8:17 PM

  natriley,

  The U.S. dollar has been declining in value since the end of WW2, but in the past few years it has been falling at an increasingly fast rate.

  There is nothing to support its value other than faith.

  The long-standing reliance on the dollar as a standard of world trade has been eroded by a the tech bubble when stocks showing no earnings were bid to extremes and the housing bubble when over evaluation of properties and loose lending practices extended runaway consumer and (as usual) government spending.

  The idea that the Federal Open Market Committee can control our economy has been widely accepted, but it is becoming clear that this myth depended also on blind faith. The Wizards, Greenspan and now Bernanke, are only as good as their ability to perpetuate the myth. Like the Wizard of Oz when we peek behind the curtain we find only ordinary men.

  The stimulus of tax rebates is nothing more than an attempt to prop up the economic data by giving the consumer a mainline shot of cash to inflate away the boogyman until after the election in November.

  The Fed is now caught between two bad choices — cutting rates to try to inflate away of huge debt — increasing rates to slow the debt growth and drive us into recession. Recession before the election will not be admitted regardless of what happens to jobs or consumer spending — It is unthinkable.

  Recession, as a remedy, has now been avoided far past what a normal market could have swallowed without severe side effects.

  The two extreme possibilities we face are hyper-inflation or (what Japan has been experiencing) market choking deflation.

  ------------------------
  Farmer,

  Nice to hear from you again. With what I am seeing at the grocery store, not to mention the gas pump, I can see that your Social Security income leaves you with very little financial freedom. So many people can’t seem to understand what this is like. I often hear friends blaming consumers wanting cheap prices as the reason our jobs left the country.

  When I was working I saw my manufacturing clients cut jobs, packaging costs, services and do anything it took to get Wal-Mart, K-Mart and other big box stores’ business.

  It took about ten years, but eventually all those companies I had done work for forty years left the country, went out of business or left town when bought by bigger companies. We’ve lost more than 10,000 (just in our city) good jobs since NAFTA. Those people who could left for jobs somewhere else, but those who couldn’t sell their house or were too old (often called “over qualified") were forced into multiple part time jobs.

  Now we’re hearing there is a shortage of trained manufacturing and construction workers and some white collar jobs (actually a shortage willing to work at todays wages) and we need to import them from other countries like Mexico and India (where U.S. pay looks rich).

  Wal-Mart is in the unique position of being able to create their own captive customer base. They helped force jobs overseas and those who lost out MUST buy their cheap foreign goods.

  Many people I knew for years were forced out of jobs they held since high school while the management received performance bonuses and huge stock option gains.
  
  Isn’t it interesting how this was done under the calls for Free Enterprise and Free Markets, but now that the subprime loans and other bad economic policies have surfaced the Free Enterprise crowd is calling for government intervention and rescue?

  Posted by whattheheck on Feb 18, 2008 at 9:13 AM

• extended discussion >>>Continued...

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Also by Jared Bernstein and Lawrence Mishel

• Escape From Recession
  What you should know about the economic stimulus package

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