Chapin: A Not Very Good Package Against A Really Bad One
As the economy has been tumbling into recession, the two parties have been almost totally polarized on what to do about it. In the House, after a lot of presidential arm-twisting and what came close to outright bribery, the Republicans managed to pass their bill by 216-214. Only half a dozen members on either side broke party ranks. In the Senate, in which a bill required 60 votes, all the Democrats and Jim Jeffords voted for the Democratic package, while 47 Republicans voted against it, enough to stop any action at all.
Thanksgiving will have come and gone, and the two parties aren't even on the same page.
The $73 billion Democratic bill was geared toward expanding unemployment and health insurance benefits, and tax rebates for people in the lower part of the tax schedule. About $20 billion of it was aimed at tax cuts for business, most especially financial firms, but including faster depreciation schedules. It wasn't a particularly good bill, but it was far better than the Republican alternative.
The bill that passed in the House, thanks to all-out support from the president, was so bad that it excited the derision of even such Republican stalwarts as Robert Novak and the editorial page of the Wall Street Journal.
It is, of course, tax cuts. Republicans today are like medieval physicians proscribing bleeding for any disease -- in their case they always propose to bleed the government for the benefit of the richest people in America. If the economy rises, if it falls, or if it just stays the same, tax cuts are the mantra, the universal solution for every ill, real or imagined.
The bill increased the ability of companies to set past losses against present income, sped up depreciation schedules, and contained many special provisions for the lobbyists of "Gucci Gulch."
But it went beyond tax cuts for the future to rebating taxes already collected, by repealing -- retroactively, for all 15 years -- the alternative minimum tax for companies. After all, last year, General Motors was savagely hit with a massive tax bill of 1.5% of its income.
So, to remedy this horrible injustice, the Republicans propose to issue GM a check for $833 million, as well as $1.4 billion for IBM, $1 billion to Ford, $671 million to GE, and so on. By the way, this "patriotic" bill also protects overseas tax-shelters, and cuts taxes for Wall Street firms with overseas operations.
If instead of giving $24 billion to America's leading corporations, the Republicans gave $1 billion each to the first two dozen people in the New York City phonebook, it would probably stimulate the economy more.
As a matter of fact, if they gave me a check for $24 billion, it would probably stimulate the economy more. If Congress wants to consider this simple solution, I would promise to put the money back into the economy faster than IBM is likely to do. I am willing to assume this patriotic duty in lieu of GM, GE, and IBM, in the sure confidence that it would be better than whatever compromise Congress may eventually dream up, a compromise that will reward lobbyists and those who hire them more than it will the American economy.
Hutchinson: A plague on both House and Senate
Discussion about the stimulus package centers on which version's better, the House version, oriented primarily towards tax cuts for corporations, or the Senate version, oriented mainly towards additional federal spending.
The truth is, neither version is right for this economy, which is in the early stages of a recession unlike any in 50 years. By increasing the budget deficit by $100 billion, without providing anything beyond a short-term Keynesian kicker, both packages would simply delay the necessary bottoming out of the recession and reduce the economy's ability to recover.
As is being increasingly written, the primary cause of this recession is the bubble of misguided investment and stock market overvaluation that preceded it. Ten Fed interest rate cuts have only slowed the decline; indeed currently the stock market appears to be trying to convince itself that 1999-2000's valuation levels were after all sound. The average tech stock is up 38 percent since late September, at a time when tech company earnings are expected to decline by 62 percent in the current quarter.
Hence there is a great deal more air to be let out of the 1999-2000 bubble, and a great deal more misguided capital investment from that period that needs to be written off (over $100 billion in venture capital was raised in 2000, more than twice the previous record.) The deficit packages do nothing to address this.
Once the air has finally left the stock market bubble, we will need new tools to help us get out of the deep recession we have entered, and to prevent the economy sinking like Japan's into a decade-long quagmire of low or negative growth. If at that time the Fed Funds rate is at or below 2 percent, and the budget deficit is around $200 billion or more, we will not have such tools.
At present, Congress should therefore keep its powder dry, and allow the recession to run its course, reaching bottom as quickly as possible. As Andrew Mellon said, "liquidate labor, liquidate stocks, liquidate farmers." Ideally, tighten money so the process of deflation happens as rapidly as possible.
Then, when the economy is close to or at the bottom (Dow 5,000 will be a good signal) there will be two stimulus measures that Congress can usefully take, a liberal one and a conservative one.
On the liberal side, the period of eligibility for unemployment benefit should be greatly lengthened, to 12-18 months, both for compassionate reasons and to prevent additional bankruptcies from those whose job searches are prolonged. Spend $50 billion in the first year on this.
On the conservative side, the double taxation of dividends should be abolished. At present, including corporate and personal taxes, dividends are taxed at a top rate of 61 percent, compared to the capital gains tax rate of 20 percent. This is grossly inequitable, and encourages mindless speculation, offshore tax havens and excessive stock option schemes. To re-ignite the corporate economy, a floor needs to be put under stock prices and that floor is best provided by encouraging dividend payouts, thus making stocks more valuable through their higher yields, while at the same time depriving sluggish companies of surplus resources for management to waste. This would also cost about $50 billion in the first year, less in subsequent years as dividends, taxable at the individual level, were increased at the expense of low-tax capital gains.
Fast into recession, fast out of it, that's what needed. Neither "package" comes close to achieving that goal.