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Friday, January 25, 2008

Paul Krugman: Stimulus Gone Bad

I'm getting pretty tired of Democrats caving in on important issues rather than standing up and fighting for their core principles:

Stimulus Gone Bad, by Paul Krugman, Commentary, NY Times: House Democrats and the White House have reached an agreement on an economic stimulus plan. Unfortunately, the plan — which essentially consists of nothing but tax cuts and gives most of those tax cuts to people in fairly good financial shape — looks like a lemon.

Specifically, the Democrats appear to have buckled in the face of the Bush administration’s ideological rigidity, dropping demands for provisions that would have helped those most in need. And those happen to be the same provisions that might actually have made the stimulus plan effective.

Those are harsh words, so let me explain... Aside from business tax breaks — which are an unhappy story for another column — the plan ... ensures that the bulk of the money would go to people who are doing O.K. financially — which misses the whole point.

The goal ... should be to support overall spending, so as to avert or limit the depth of a recession. If the money ... doesn’t get spent — if it just gets added to people’s bank accounts or used to pay off debts — the plan will have failed.

And sending checks to people in good financial shape does little or nothing to increase overall spending. ... Give such people a few hundred extra dollars, and they’ll just put it in the bank. In fact, that appears to be what mainly happened to the tax rebates affluent Americans received during the last recession in 2001.

On the other hand, money delivered to people who aren’t in good financial shape ... does double duty: it alleviates hardship and also pumps up consumer spending.

That’s why many of the stimulus proposals we were hearing just a few days ago focused ... on expanding programs that specifically help people who have fallen on hard times, especially unemployment insurance and food stamps. ...

There was also some talk among Democrats about providing temporary aid to state and local governments, whose finances are being pummeled by the weakening economy. Like help for the unemployed, this would have done double duty, averting hardship and heading off spending cuts that could worsen the downturn.

But the Bush administration has apparently succeeded in killing all of these ideas...

Why would the administration want to do this? It has nothing to do with economic efficacy... Instead, what seems to be happening is that the Bush administration refuses to sign on to anything that it can’t call a “tax cut.”

Behind that refusal, in turn, lies the administration’s commitment to slashing tax rates on the affluent while blocking aid for families in trouble — a commitment that requires maintaining the pretense that government spending is always bad. And the result is a plan that not only fails to deliver help where it’s most needed, but is likely to fail as an economic measure...

And the worst of it is that the Democrats, who should have been in a strong position — does this administration have any credibility left on economic policy? — appear to have caved in almost completely. ...[B]asically they allowed themselves to be bullied into doing things the Bush administration’s way.

And that could turn out to be a very bad thing.

We don’t know for sure how deep the coming slump will be... But there’s a real chance not just that it will be a major downturn, but that the usual response to recession — interest rate cuts by the Federal Reserve — won’t be sufficient to turn the economy around...

And if that happens, we’ll deeply regret the fact that the Bush administration insisted on, and Democrats accepted, a so-called stimulus plan that just won’t do the job.

    Posted by on Friday, January 25, 2008 at 12:30 AM in Budget Deficit, Economics, Policy, Politics, Taxes, Unemployment | Permalink  TrackBack (0)  Comments (88)

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