Reported Stimulus Package Would Provide Little Immediate Boost Due to Removal of...

Reported Stimulus Package Would Provide Little Immediate Boost Due to Removal
of Most Effective Provisions

What: Statement by Robert Greenstein, Executive Director, Center on Budget and
Policy Priorities

Changes reportedly made last night in the stimulus package would reduce its
effectiveness as stimulus. Although the package includes a reasonably
designed tax rebate, the two most targeted and economically effective measures
under consideration - a temporary extension of unemployment benefits and a
temporary boost in food stamp benefits - were zeroed out, apparently at the
insistence of House Republican leaders.

The two respected institutions that have rated stimulus options in recent days
- the Congressional Budget Office and Moody's Economy.com - both give their
two highest ratings for effectiveness as stimulus to the two measures that
were dropped.

* Of all tax and spending stimulus options that CBO examined, the only two
that it found would have a large "bang-for-the-buck" as effective stimulus and
act fast to boost the economy are the unemployment insurance and food stamp
provisions. Both could start injecting more consumer purchasing power into the
economy within one to two months. The planned tax rebate checks, in contrast,
are not likely to be sent out until June.

* Economy.com found that for each dollar spent on extended UI benefits, $1.64
in increased economic activity would be generated. For each dollar in
increased food stamp benefits, $1.73 in new economic activity would be
generated. No other options rated as high.

* In contrast, Economy.com found that for each dollar in "accelerated
depreciation" - the main business tax cut in the package - only 27 cents of
increased economic activity would be generated. CBO and a Federal Reserve
study in 2006 found that the business tax cuts adopted in the last recession,
which closely resemble those in the current package, had only modest
stimulative effects. Despite this evidence, the package apparently contains
at least $50 billion in business tax cuts while excluding unemployment
insurance - the single measure most focused on the people hardest hit by the
downturn - and food stamps.

* The business tax cuts also would cause states to lose at least $4 billion
in state revenue, due to linkages between federal and state tax codes. The
package contains no fiscal relief for states, not even to offset this loss.
As a result, many states will have to enact deeper and more painful budget
cuts, likely hitting areas from health care and education to aid to local
governments. Those state budget cuts will also act as a drag on the economy.

The unemployment insurance and food stamp provisions apparently were rejected
by House Republican leaders, who reportedly said that the inclusion of
spending measures would be unacceptable to the House Republican Caucus and
would derail the package. Such a stance reflects the elevation of ideology
over sound economic reasoning. As Nobel laureate Joseph Stiglitz and now-CBO
director Peter Orszag wrote in late 2001, "Basic economic analysis indicates
that increased government expenditures can indeed be stimulative, and, in
fact, are often more effective as stimulus measures than tax cuts."[1] This
is because a
significant portion of most tax cuts is saved rather than spent.

Rebates Are Reasonably Designed

The package does contain reasonably designed tax rebates. The rebate
component is vastly superior to the rebate proposal that the Administration
developed last week, under which more than 25 million low- and moderate-income
working families would have been shut out. Most of those families would get a
substantial rebate under the new package.

(Even so, the rebates will not be fully as effective as stimulus as they could
have been, since the rebates for working-poor families will apparently be
smaller than those for middle- and upper-middle-income families. Since the
working poor are the people who will spend - rather than save - the largest
share of their rebate dollars, the optimal design would be one under which
working-poor families do not receive smaller rebates than people at higher
income levels do.)

In the bipartisan negotiations over the stimulus package, an appropriate trade
would have been to include the sizable (but not especially effective) business
tax cuts in return for a rebate that extended to the working poor, but not to
drop the unemployment insurance and food stamp provisions. It is unfortunate
that those two provisions - the most targeted and effective measures under
consideration - were removed, and that states facing deficits will be driven
deeper into deficit and thus have to cut services or raise taxes more, rather
than being provided some fiscal relief.

End Notes:

[1] Peter Orszag and Joseph Stiglitz, "Tax Cuts Are Not Automatically the Best
Stimulus: A Response to Glenn Hubbard," Center on Budget and Policy
Priorities, November 27, 2001, http://www.cbpp.org/11-27-01tax.htm.

This statement is posted to:
http://www.cbpp.org/1-24-08bud-stmt.htm
http://www.cbpp.org/1-24-08bud-stmt.pdf 2pp.

The Center on Budget and Policy Priorities is a nonprofit, nonpartisan
research organization and policy institute that conducts research and analysis
on a range of government policies and programs. It is supported primarily by
foundation grants.

CONTACT: Michelle Bazie of the Center on Budget and Policy Priorities,
+1-202-408-1080, bazie@cbpp.org

/PRNewswire-USNewswire -- Jan. 24/
SOURCE Center on Budget and Policy Priorities