Here's how to deal with a recession: A federal government which is already spending more than its income should borrow even more money, so as to give lots of people a tax rebate. This is the bipartisan plan of President Bush and Congress. They are taking a leaf from the presidency of Jimmy Carter.
Even accounting for inflation, the Bush-Reid-Pelosi rebate is far more profligate than the proposed Carter rebate of 1977. But the two rebates appear to be based on the same demand-side principles.
President Carter also proposed tax rebates during the 1980 election campaign, as an alternative to Ronald Reagan's calls for tax cuts.
Some of the critics of Carternomics were known as "supply-siders." Ronald Reagan and his supporters argued that the best way to promote economic growth was not for the federal government to give people money, but for the government to cut marginal tax rates for the future, thereby spurring "supply-side" production and investment. The Bush tax cuts of 2001, and much of the tax policy of the rest of the Bush administration, were implementations of supply-side policy.
But the 2008 tax rebate brings us full circle back to 1980, as the final year of the Bush administration increasingly resembles the final year of the Carter administration-- including national malaise, getting tough on Israel but not on Palestinian terrorists, support for the DC handgun ban, the Olympics hosted by a communist regime with contempt for human rights, and a consensus that the current adminstration is lacking in competence.
There are important differences, of course. Including the probability that if the next President is a transformational one, that President will not an ideological successor of the genial, far-right Ronald Reagan, but instead will be the genial, far-left Barack Obama.
Carter-Bush tax rebates:
My take is that for many people, it will be used to stave off lenders and pay down some personal debt ... in other words, it's going to end up in the hands of those irresponsible lenders who buiolt the sub-prime house of cards.
I suspect that cloaking it as a tax rebate to individuals is just more politically palatable than a direct bail-out of the banks and financial institutions.
And how did that work out? Oh yeah, nearly doubled the federal debt in less than 7 years.
Maybe, maybe not. We'd need to know if tax receipts actually declined or if spending simply outstripped them.
I guess it depends on what issues you care about. Being a labor law guy, I'll tell you that his labor and employment policies, from the NLRB to the DoL, have been the most right wing (meaning anti-union and anti-workers' rights) of any President since. . . . well, since the passage of the National Labor Relations Act (and that means including Reagan).
As to the "stimulus" package, I'm not an economist, but I found Paul Krugman's article today reasonably persuasive.
http://zfacts.com/p/318.html
The site above is obviously heavily biased, and it counts the Social Security Surplus as revenue to give Clinton that last boost at the end. But it's pretty obvious to me that, even correcting for all that, debt-per-GDP has still risen.
We are greatly better off financially than we were back in the Carter years in large part due to the economic policies implemented by Reagan. The media is doing everything in its power to bring back the malaise though.
I agree though that the stimulus package looks like something Carter would sign on for.
[My text called Reagan "far right." It's not an epithet, in this context, since Reagan was a popular president (two landslides) and highly regarded these days by most people. And Reagan was from the far right side of the American political spectrum, even though people like Phil Crane were even further. Same for Obama, in mirror image, even though Dennis Kucinich is even further left.]
Under the “stimulus” plan proposed by House leaders and the White House, you get a “rebate” — even if you work so little that you pay no taxes — but not if you work so much that your income exceeds a certain level. That’s a disincentive to work. Yet they have the audacity to call it an economic “stimulus”! (Rebates did not revive the economy in past recessions.) It’s just another form of welfare that will drive up the deficit.
Under the plan, you get a “rebate” if you have as little as $3,000 in job-related income per year, and there were no taxes in the first place to rebate.
But if your income exceeds an arbitrary limit ($75,000 for a single taxpayer, or $150,000 for a married couple), your rebate is rapidly phased out. For a single person, the rebate is generally $600; for a married couple, $1200; and a married couple with two kids, $1,800. But these rebates rapidly disappear if you make more than the limit.
The net effect is that if your income is just above the limit, in the “phase-out” range, you are subjected to a radically increased marginal tax rate that discourages you from working to increase your income. That’s because most of each additional dollar in income will go to the government in the form of lost rebates, federal or state income tax, or social security tax. (Families in the phase-out range for rebates disproportionately live in high living-cost, high-tax states with substantial state income taxes).
This arbitrary limit on who can receive rebates was demanded by House Democratic leaders to keep so-called “rich” people from receiving them. But many middle-class people in high-living cost areas like the New York and Washington, D.C. metropolitan areas make more than the limit.
By contrast, some rich people who don’t work much will get rebates despite the “stimulus” plan’s income limit because its arbitrary limit is based on “adjusted gross income,” not actual income, and cash from things other than employment often doesn’t get included in “adjusted gross income.” For example, Lisa Bonder Kerkorian, who received $600,000 per year in child support from her billionaire ex-boyfriend Kirk Kerkorian (for a child he learned too late was not in fact his), would qualify under the plan as long as her earned income was less than $75,000. That’s because child support is one of the non-employment sources of income that’s not even included in the federal definition of “adjusted gross income,” no matter how big it is, and even if the money is in practice spent largely on the unwed mother, not the child.
The “stimulus” plan could get worse, increasing penalties for being married (for a few taxpayers, like me, the current version already contains a marriage penalty; my wife would qualify for a rebate if only she hadn’t married me, and would have gotten a rebate for our baby daughter, too, if our daughter had been born out-of-wedlock). Yesterday in the news was talk of a slightly-different income limit in the “stimulus” plan that would have set the limit for the rebates at a maximum income of $95,000 for singles and $170,000 for married couples. Under that proposed limit, two people living “in sin” could get rebates if they made a total of less than $190,000 ($95,000 each), but a married couple would have to earn less than $170,000 ($85,000 each) to get a rebate, taking away married people’s rebates even if they made less money than single people who’d receive them.
The “stimulus” plan also perversely increases the role of Fannie Mae, the government-backed mortgage giant that, more than any other institution (except conceivably the FHA), helped create the real estate bubble that now threatens the economy with a recession. It gives Fannie Mae, whose management perpetrated an Enron-like accounting scandal, broad new power to make billions of dollars of risky loans in the most overpriced and volatile housing markets, by radically increasing the maximum dollar value of the loans it can handle. (Taxpayers will have to pick up the multibillion dollar tab if it goes broke gambling in the housing market).
The money doesn't need to "come" from anyplace, of course... they can just take a little less than they'd planned.
Nahhhhh---that couldnt have been it.
Well, at least he's done something right.
As for the rebates, weren't the prior rebates $300, or the amount they cut taxes by making the rate on the first bracket a couple points lower? So in effect, didn't they cut marginal rates for those who happened to be in that marginal bracket, and just sent the check early rather than reducing withholding or giving bigger refunds?
Does this plan differ? I understand some will get rebates who don't pay taxes, and many aren't in that lowest marginal bracket, but this did (does?) represent a marginal rate cut for some taxpayers, right? So it does/did have some supply side effect, right?
Since its a "one time" rebate (I use quotes because of course people can get used to repeated "one time" programs and begin to change their behavior accordingly) it should not affect behavior in the way you describe.
For example, ou talk of marginal tax rates and choice of how much to work, with people not wanting to make more than $75k in AGI. But this "one time" rebate is on money already earned (tax year ended in December). So, its too late for people to try to drop below $75k in AGI (except by the AGI deductions in their tax filing).
However, there is one area where behaviors can change: the unemployment benefits portion. How they think it will stimulate the economy to extend unemployment benefits, I don't know. You are putting cash in people's pockets to spend, true, but you are also suggesting that people stay out of the workforce for a little while longer - thereby reducing output in the economy and reducing the incomes of those people who would have worked. Its exactly the wrong thing to do.
Overall, some of the package might help a bit (depending on how it is "paid for") because money may go from the public sector to the private sector, but most of the package is either neutral or worse.
Is Congress really trying to bail out Macy's, Sears et al.?
While it may be nice to bash unemployed workers as a bunch of lazy layabouts who won't go back to work until the very last possible minute (when all their benefits run out), such people are a very small percentage of the pool collecting unemployment. If you have evidence to the contrary about people who have lost their job through no fault of their own and are seeking a new one (both requirements for unemployment insurance benefits eligibility), please provide it.
The only way you can say that the 2008 tax rebate brings us "full circle" back to Jimmy Carter is if the 1974 tax rebate never happened. But it did. So you can't.
If supply-side policy opposes tax rebates, and Bush's tax policy was an implementation of supply-side principles, then why did Bush pass a tax rebate in 2001?
The answer, of course, is that not all tax rebates are made equal. One-time tax rebates like the current one are used as part of stimulus packages designed to quickly increase aggregate demand. In 1980 Carter did not propose his tax rebates as part of a stimulus package designed to mitigate the effects of a recession, because the country was not in a recession in 1980. He proposed tax rebates as an alternative to Reagan's tax cuts.
Comparing the current tax rebate to Carter's proposed rebates is either naive or dishonest.
You'd think the Republicans would have noticed this. But they seem not to have. The Romney or McCain administrations would likely give us a third example.
Note that the rebates will only discourage work (as opposed to punishing past work) if they are sent out in 2009, not just in 2008.
If they are just mailed out this year (2008), based on income earned in the preceding year (2007), it won't have much of an effect on work, because people can't change how much they worked in the past, or how much they earned in the past.
There's no guarantee that any recession will last into 2009, or that refunds will be sent out in 2009 as well, and I should have acknowledged that in my comment.
The uncertainty about whether the refunds will be renewed reduces the disincentive effect.
"IN AMERICA, WE have a two-party system," a Republican congressional staffer is supposed to have told a visiting group of Russian legislators some years ago.
"There is the stupid party. And there is the evil party. I am proud to be a member of the stupid party."
He added: "Periodically, the two parties get together and do something that is both stupid and evil. This is called-bipartisanship."
I believe that the plan was to strip back current program spending to pay for the rebate. Not sure which programs were affected by it.
So, how would that stimulate the economy? I mean, it's not like the money used in government programs just vaporizes. It also enters the economy, through payments to govt contractors, salaries of govt employees, even direct welfare payments. This sounds like trying to fill a bucket by stirring the water that's already in it.
Only if they were taking in more than they were spending in the aggregate, which, of course, they are not. Thus, this money most certainly has to "come" from someplace, and that would be buyers of Treasury bonds. Who is buying them? China and Saudi Arabia, mostly.
Overall, this plan is a complete shot in the dark. Most of the money won't be paid until June. If the Administration knows what economic conditions will be then, I wish they'd let me know so I can adjust my investments accordingly. In truth, they have no idea. So this money will be hitting the economy when conditions could be quite different than they are now.
At a more fundamental level, where is the evidence that this economic crisis is consumer-driven? The issue has a lot more to do with credit issues and Wall Street. The banks and rating agencies are learning that they basically had no idea how to rate and price mortgage-backed securities. That inability to price, in turn, permitted the making and packing of thousands of stupid loans, which in turn inflated housing prices to absurd levels. That is what has to get corrected, and it will be painful. Giving folks an extra $1,000 to spend won't fix it, and they won't even spend it if their home equity is gone.
If, as suggested by Orielbean, the money for the stimulus is to come from cutting existing programs, it's a complete fraud, since total demand will not rise.
Well, you can look to countries where unemployment benefits last longer and notice the trend of longer durations of unemployment (and hence also longer "long-term unemployed" percentages). You can also look at the statistics that show that a huge percentage of people who receive unemployment benefits magically seem to find their job right as the benefits expire (the last week as opposed to any other week during the 6 month period). You can also use common sense.
I don't think you have to be a lazy layabout to take advantage of the full period you are given unemployment benefits - you paid for them already, after all. It makes sense for those who have a choice and who would not be making a terribly huge amount more at work (or who can afford to make less for a while) to stay on the benefits until the end and then begin work again.
Then there are some people in part-time, temporary or contract, artistic, tips-based and similar kinds of work areas who actually work for 6 months, then go on benefits for 6 months and then work for 6 months, etc. This isn't a huge portion but it isn't insignificant. And, when you look to other countries where the benefits or period of required work differ, you'll notice that the behavior of these people differs in parallel.
Nick P.,
Actually, if that is what they are doing that would be great. There are many many reasons why moving funds from the public sector to the private sector would be a great stimulus. Unfortunately, I am sure they will just use deficit spending instead - and besides, its a tiny amount.
Try searching "extended unemployment benefits disincentive to search for work" and you will find many studies, some of which conclude that the extensions are a disincentive.
You don't have to be a "lazy layabout" to respond to a disincentive.
http://www.nytimes.com/2006/07/31/business/31men.html
And yes, this rebate is 100% politics, 0% economics. With the economy growing at almost 5% in the latest quarter reported [hey, where'd that recession go?] , it would only take a matter of months to overcome the 2.8% drag on GDP caused by the current subprime problem. [source: DB Global Research]
But of course, one of the reason our unemployment rate is so low compared to other, especially European, countries, is precisely because those whose unemployment benefits have expired, and don't bother to remain registered with their local unemployment offices, are magically no longer considered unemployed, even if they are not working are actively seeking employment.
Then there are some people in part-time, temporary or contract, artistic, tips-based and similar kinds of work areas who actually work for 6 months, then go on benefits for 6 months and then work for 6 months, etc.
Again this is a patently absurd statement since it doesn't even reflect the reality of how unemployment insurance works (generally, to be eligible you must have 18 months of continuous employment). Also, for the purposes of unemployment insurance, tips are not counted, only base salary, so those who depend on tips for a large portion of their salary are in dire straits if they become unemployed.
It makes sense for those who have a choice and who would not be making a terribly huge amount more at work (or who can afford to make less for a while) to stay on the benefits until the end and then begin work again.
Again a patently absurd statement, as this statement applies to only a very small portion of the unemployed.
One other complication with UIB is fraud, AKA, collecting UIB while working under the table. This tends to be less common since the penalties can be high if the state UIB office finds out, but is an attractive way to get out of the above problem.
My personal experience supports the studies cited above.
Also, pure economic theory would suggest that the marginal benefit of forty hours of additional free time might well exceed the marginal benefit of the difference between unemployment benefits and the wages of a full-time job foir persons at the lower end of the wage scale.
The fact is that government action is clumsy more often than not, and there are plenty of examples in every government subsidy program. There are lots of reasons, but two of the more important are "equal protection of the law" and the need to individual eliminate judgment (as an anti-fraud measure) from procedures.
It'll certainly affect the year-end tax planning behavior of those near the cut-off. Catch-up 401(k) contributions, comp deferrals and spousal IRAs will be the tools of choice.
Yes, and as with the Laffer curve which is the foundation of supply-side policy (and lacks any empirical support), it hasn't quite panned out the way it was intended in practice. The beast has not been starved, but has instead elected to tax future generations through massive deficits and new, unfunded by revenues spending and ignored our long term, unrealized liabilities. The Laffer curve has two endpoints where the values are known, and in between is rank speculation. Actually if we did a one time future tax *increase* in the capital gains tax (say, effective at the beginning of 2009), we could stimulate people to liquidate some holdings now, get more liquidity into the system, and best of all reduce some of the rampant federal budget deficit at the same time.
Yes, yes. Since events don't fit into the problematic category everyone has worried about, they clearly don't constitute a problem at all! Neat trick.
The unemployment aspects are being proposed by some Senators who are probably trying to make their mark after having been left out of the original negotiations.
Where is your god now?
In 2001, the main Bush tax strategy was tax rebates. Most economists seem to agree that this did not work very well, and we limped our way through a mild recession. (Although it might not be fair to complain about their ineffectiveness given that 9/11 occurred soon thereafter.)
In 2003, the main Bush tax strategy was cutting marginal tax rates. This DID work very well, and has helped spur pretty decent growth for the past four years, with a couple of astounding near-record quarters, if I remember correctly.
Expressing the deficit as a ratio of deficit to total government budget doesn't really help. The government can (and has, and will) hide huge deficits through a massively larger operation.
Expressing the deficit as a ratio of deficit to GDP gives us a better understanding of our debt load. That's been rising throughout the past 8 years, at about 4% now. (And that's using the Social Security surplus for general expenditures.)
It is completely false that "those whose unemployment benefits have expired, and don't bother to remain registered with their local unemployment offices, are magically no longer considered unemployed." The unemployment rate is not calculated by counting those who get benefits or by counting those who "register" with unemployment offices. It is calculated through surveys.
The "stimulus", of course, isn't. It is pure political cover for the election-year politicians who had to Act Concerned about possible recession. In politics, you have to give and take to get provisions you want, so Bush gave on the lower income rebates as long as they are one-shot deals, and got some business tax provisions relating to capital investment. Any agreement you get with the Dems has a cost, and like it or not, doing nothing isn't an option because of all the media hype over the subprime problem. You can't have CNN blasting all day about recessions (at a time when there hasn't even been a single quarter of negative growth) and setting the psychology to create the rumored recession, because confidence is about 75% of the battle in weathering the mortgage-driven slowdown.
And, BTW, the important issue about debt is twofold- 1) keep your total debt-equity ratio manageable (in this case, it is debt as a percentage of GDP), and be sure your cash flow can service the debt. That is not a concern for the feds.
Expressing the deficit as a ratio of deficit to GDP gives us a better understanding of our debt load.
That is exactly the what the 1.8% figure is. It is apparent you are quite confused over the figures, if the deficit as a % of total budget is 1.8%, and the deficit as a % of GDP s 4% as you erroneously state, that would make the federal spending about 2.2 times larger than the US economy. While I realize this is a long term goal in Washington, it has not been achieved yet.
If you really want to measure what our debt load is it is the national debt divided by GDP. That is about 60%.
This
has a bunch of graphs. The third one down addresses this specific question, and it shows you're right and I'm wrong.
And I'm happy to report the stimulous is working already. I went home last night and booked a three week vacation for my wife, my son and I in Europe in April. My 1500 check come May will come in handy when the credit card bills start rolling in.
Meanwhile we could be either making the current tax cuts permanent or finding a new set to replace them, which would encourage sustained growth instead of the naggin problem of the huge tax hike scheduled to hit when Bush's cuts expire.
And of course in the longer term it puts us that much closer to complete financial collapse when the boomers retire.
How bout this- government sends everybody the tax rebate and tells us we're on our own for retirement (kinda like real grown ups). THAT would solve our financial problems.
A fact which was widely noted when he ran for his first term, implicitly agreeing with a common liberal attack on conservatism by declaring himself to be a compassionate conservative.
In contrast to the usual sort, don't you know...
No, they knew. It was the conventional wisdom forever that the sustainable value of a house was one where the mortgage payments would be 25-30% of the income of the class of person buying it. But lenders just ignored the fact, writing ludicrous mortgages and creating downstream financial instruments whose price was utterly dependent on the supply of greater fools.