:: blame the extended gestation.... ::

:: Friday, November 01, 2002 ::

How not to stimulate the economy
Bush proposal fails tests any successful stimulus package should pass

by Christian Weller and Laura Singleton


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"Instead of a quick infusion of cash to energize the economy, the Bush Administration offers some proposals that would take years to become effective and some that would actually harm overall demand.

The President’s most costly “stimulus” proposal is to make last year’s tax cuts permanent after 2012. But in order to end the slowdown and prevent another recession, government stimulus is needed immediately, not 10 years from now.

Likewise, a major element of the Bush plan rests on the fast-track “trade promotion authority” that he recently obtained from Congress. But major trade agreements take years to negotiate. Such agreements as the proposed Free Trade Agreement of the Americas, even if eventually achieved, cannot possibly provide the near-term stimulus that the economy needs now.

Moreover, trade deals negotiated in the 1990s, such as the 1994 North American Free Trade Agreement, actually hurt the economy. The trade deficit has exploded since 1994 and shows no signs of abating. As a result, the United States has lost more than 3 million high-paying jobs, mostly in manufacturing industries like aircraft, electronics, steel, and textiles. And the deficit growth has required increasing amounts of capital inflows, turning the United States into the world’s largest debtor and putting its economic stability at risk.

As for the increase in contribution limits for 401(k) plans, proposed recently by President Bush at his economic forum in Waco, Texas: even if successful, this measure would not stimulate demand but rather would increase savings and drive down consumption. Consumer spending is the only part of the private economy that has contributed to growth over the past two years. A decline in consumption could push the United States back into recession."


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"Any robust economic recovery to growth rates above 3% will require an additional economic stimulus in the form of more government spending. The only factor that kept the recession from deepening in the past year was the increase in federal government spending and tax rebates. Indeed, government spending is the most viable way to stimulate demand quickly.3 Without substantial short-run stimulus, the economy is likely to remain fundamentally weak well into 2003."

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"Another major source of future weakness is the growing share of consumption that has been financed out of debt. Consumer debt has remained at very high levels—more than 14% of disposable personal income—through the first quarter of 2002. Default rates reached record highs in the first quarter of 2002 as they jumped from 3.3% to 4.1% for all consumer loans and from 6.3% to 9.2% for credit cards. The growth in borrowing and default rates will make it harder for consumers to finance continued consumption with credit cards or other kinds of debt."

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"Finally, growth in spending by federal, state, and local governments so far has been the economy’s main salvation. However, state and local governments, which collectively spend almost twice as much as the federal government on consumption and investment (excluding transfer payments), are reeling from the budget impact of the recession. Fiscal crises at the state and local level are already exacerbating the recession by leading to spending cuts and raised taxes. These ongoing state and local fiscal crises will further dampen growth in 2003."

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Not only is the Bush plan too small, it targets the wrong people. None of the proposed policies would help those hardest hit by this recession, particularly low-wage workers, recently hired and fired welfare recipients, and the long-term unemployed. In fact, many of the president’s proposals, such as increasing the tax exempt contribution levels for 401(k) and IRA accounts, will only help the most affluent Americans, as currently less than 5% of individuals with 401(k)s—mainly high-income individuals—contribute the maximum amount allowed.

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:: Jim Nichols 11/01/2002 09:35:00 PM [+] ::
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