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Monday, March 24, 2008

Bruce Bartlett: Stop Those Checks

Bruce Bartlett says we should cancel the rebate checks and use the money in other ways:

Stop Those Checks, by Bruce Bartlett, Commentary, NY Times: With unusual speed and cooperation last month, George W. Bush and Democrats in Congress agreed to a tax rebate set to be paid out beginning in May. Families will get checks for $300 to $1200 or more, and it is assumed that they will all rush out to spend this money immediately, giving retailers a boost that will raise economic growth.

Despite the bipartisan support for the rebate, few economists have supported the idea. They note that we have tried rebates in the past — most recently in 2001 — and there is no evidence that they have meaningfully stimulated either consumption or growth. By and large, people saved the money they received or paid bills...; very few used their rebates to increase spending.

The true reason why the current rebate has been so popular in Washington is that giving away free money in an election year is good for politicians of both parties. Superficially, it looks as if Washington is responding to a real problem with decisive action. ...

But in the almost six weeks since the rebate legislation was signed into law, the economic situation has changed. The meltdown in financial markets is much more serious than it looked in February. ...

The solution, therefore, is not to drop $100 bills from helicopters — which is essentially what the rebate would do. Rather, what we need is a mortgage Superfund that can clean up the toxic waste. If we can cleanse the financial system of at least some of the bad debts, it will do far more to restore the economy to health than anything that could be accomplished by the rebate...

We all know that the government is eventually going to get stuck with a lot of the bad debts... At the same time, there are increasing demands for targeted relief for homeowners facing foreclosure. It looks to many people as if Washington cares more about fat-cat bankers than working families in hard times. At some point, Congress is going to respond with additional aid for people caught in the mortgage mess, and this relief will come on top of the $117 billion cost of the rebate.

We need to stop and ask whether we can afford to spend $117 billion that the Treasury Department does not have on a program of dubious effectiveness. It simply makes no sense to send out checks to people who have no need for it as some kind of election-year bribe to vote for incumbents of both parties. That money would go a long way toward cleaning up the mortgages that are poisoning the financial sector.

Congress should immediately repeal the rebate and redirect the money that has been budgeted into a package of measures that would help the housing sector and those people who actually need assistance. The Treasury might use some of the money, for example, to enable Fannie Mae and Freddie Mac ... to buy up some of the bad mortgages, get them off bank balance sheets and help homeowners refinance them.

My gut tells me that the vast majority of Americans would happily give up their rebate if they knew that the money would be used instead to help families in need and start the process of cleaning up the bad debts in the housing sector. Everyone knows that we will have to spend the money eventually...

This is a proposal that both Republicans and Democrats should embrace. It involves no increase in the deficit. We would simply redirect already appropriated money...

The checks haven’t gone out yet so no one has to give anything back. Congress could pass a repeal bill in a day if it wanted to. At a minimum, hearings should be held on this proposal in light of the country’s deteriorating financial situation.

Some people may have already purchased goods on credit and are planning to pay it back with the rebate, so the fact that the checks haven't gone out yet does not imply the rebates have not yet altered people's plans. Breaking promises now is a bad idea.

However, if we were to do this, instead of repealing everyone's rebate, how about leaving the rebates in place for households with incomes under a certain amount, households that are likely to spend the money rather than save it, and repeal it for households with higher incomes? I don't object to any of the spending because it increases the deficit, that's how the economy is stimulated (and you pay for the rebates when times are better helping to deflate or prevent bubbles), but there's no reason for the rebates to go to households who are unlikely to use the money to stimulate the economy, particularly when we might use the money more productively in other ways, e.g. on programs to prevent foreclosures.

But we can wish all we want, the rebates are in place, the machinery is rolling forward, and nothing will stop them now (and since they have already been promised, nothing should stop them). The rebates are water under the bridge. We could have structured the fiscal policy response in a much more productive way, but we didn't. Now we need to devote our attention to preventing further troubles rather than wasting effort trying to change what has already been done. If enabling "Fannie Mae and Freddie Mac ... to buy up some of the bad mortgages, get them off bank balance sheets and help homeowners refinance them" is the best policy to pursue - and a policy along those lines would help if we could do it quickly enough - then what are we waiting for? Whether we have rebates or not doesn't matter, we should do what is needed to get the mortgage repurchase program into place as soon as we can.

But the politics make me doubt that we will be able to craft an effective fiscal policy response to deal with the foreclosure problem. I hope politicians prove me wrong, that they will move as fast to help struggling homeowners as they would if tax cuts were on the table, but that seems unlikely. For that reason, the burden may remain largely with the Fed, and they will need to consider the full array of both conventional and unconventional policy responses if conditions continue to deteriorate. And if the Fed does succeed in bailing us out of this mess, it will be in spite of rather than in conjunction with fiscal policy. The rebates might help a little, but the rebates are not enough. Politicians will tout their responsiveness in time of need by citing the rebates voters received, but the truth is that the response has been inadequate, and voters ought to ask what politicians have done to help stem foreclosures, and what additional measures they have taken or plan to take in response to the crisis, for example on the regulatory front. Let's hope the Fed can pull this off.

    Posted by on Monday, March 24, 2008 at 12:42 AM in Budget Deficit, Economics, Financial System, Fiscal Policy | Permalink  TrackBack (0)  Comments (21)

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