President Bush’s recently announced economic stimulus plan shows that his administration is ready to get something done when it comes to jump-starting the economy. Yet the president’s proposals are clearly only a start.
By focusing on temporary measures—rather than pushing for permanent tax cuts as some conservatives had threatened—the Bush administration recognizes that a true stimulus is a short-term, quick-acting package designed to spur the economy rather than generate political debate. Congress should welcome the prospect that the president is ready to act.
Regrettably, however, the Bush administration’s plan is not complete, and it contains several components that are not well-designed to provide an effective stimulus and help where it is most needed. Here are four cases in point.
The Bush plan doesn’t target the tax rebates to those who are most likely to spend it.
The Bush administration proposes to give only partial or no help to the 40 percent of tax filers with modest incomes—less than $40,950 a year. Families of four making less than $24,950 would get nothing. The Congressional Budget Office reported earlier this week that lower-income Americans are likely to spend more of their rebates, infusing money into the economy more quickly than higher-income Americans who are likely to save their rebates. With long-term fiscal responsibility in mind, we must have the biggest bang for the public’s buck for all dollars spent on the stimulus.
The Bush plan lacks an effective way to get the rebate to low-income Americans who will spend it quickly.
A more directed approach is needed to target the stimulus funds, such as providing a single, flat, uniform rebate to all families that qualify for the Child Tax Credit or the Earned Income Tax Credit. Moreover, a flat amount would be administratively simple, could be implemented rapidly, and would minimize errors. This could be supplemented with a refund to other middle-class taxpayers with no children.
It is essential that the tax rebate be refundable—available to lower-income families that have little or no income tax liability—because such families have the greatest and most immediate needs and are most likely to spend the money in ways that will infuse funds into their communities. And further steps should be taken to address those not in the tax system, such as giving that group a temporary increase in food stamps that would be spent immediately.
The Bush plan does not address the housing crisis or stem the loss of home equity.
Nothing that the Bush administration or Congress could do in 2008 would be more important for American families than to stem the decline of home values by implementing a solution to slow foreclosures and move the inventory of unsold homes. To address the economic downturn, the stimulus plan must target its underlying cause.
In the memo A Practical and Progressive Economic Stimulus and Recovery Plan, the Center for American Progress Action Fund proposes a refinancing vehicle for creditworthy homeowners who cannot refinance because they owe more than their house is worth. The Center for American Progress plans to design a mechanism that would rely on existing market players, existing mortgage finance delivery systems, and familiar financial market instruments, coupled with federal credit enhancements to refinance these homeowners quickly. The Bush administration ought to work with Congress to explore more options.
A stimulus should include temporary increases in Unemployment Insurance and Medicaid costs.
During a downturn, the number of unemployed is likely to grow, as will the length of unemployment spells. That’s why temporarily expanded unemployment benefits are particularly effective as a stimulus because unemployment insurance recipients will quickly spend their benefits.
Further, temporarily increasing the federal share of Medicaid costs is another way to provide some economic stimulus for those states and their citizens most directly affected by the immediate economic consequences of a recession. With shrinking tax revenues, state spending will contract without additional federal support for key services.
There is insufficient detail on the Bush plan’s business tax component to assess its merit. The nature of this slowdown is largely consumer-driven, but a case might be made for a highly targeted small business credit designed to incentivize rapid new investment. That case has not been made yet.
Our country faces an economic downtown that will likely be serious—and possibly devastating. The stimulus package ought to be only the first step of many to ensure that average American workers who failed to benefit from the economic growth of the last business cycle won’t be the hardest hit. Given families’ struggles, we can (and must) do more than the Bush administration proposes.
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