You Say Stimulus, I Say Stimulus
TWI parses the myriad stimulus proposals and quizzed economists about which they expect the Obama administration and Congress use in their attempt to turn around the U.S. economy.
Jul 31, 202076.3K Shares1.4M Views
Image has not been found. URL: /wp-content/uploads/2009/01/usa-work.jpgNew Deal era Work Project Administration Poster (1930's)
It’s almost impossible to turn on the news or open a paper and not hear the term “stimulus.” That one word is quite the multitasker; it can mean anything from tax rebates to public works programs to interest rate cuts, and sometimes refers to a combination of these and other recession-busting tactics.
The array of definitions might seem confusing, but it doesn’t have to be. TWI parsed the myriad stimulus initiatives on the table and quizzed economists about which ones they expect the Obama administration and Congress use in their attempt to turn around the U.S. economy.
Illustration by: Matt Mahurin
When economists talk about stimulus, they break it down into two main types: monetary stimulus and fiscal stimulus. Monetary stimulus revolves around the Federal Reserve lowering key interest rates; fiscal stimulus refers to government spending, either in the form of tax cuts or investments in public works or social programs.
Monetary stimulus was the first tactic policymakers deployed when the subprime mortgage market showed signs of trouble in 2007; since September of that year, the Fed has lowered the benchmark interest rate a total of 10 times, bringing it to a record low of between 0 and .25 percent. While left- and right-leaning economists rarely see eye to eye, one thing they agree on today is that these rate cuts didn’t solve the problem, and with the key rate so close to zero, the Fed can’t cut much more.
But monetary policy shouldn’t be counted out just yet, according to Jeffrey Kling, senior fellow and deputy director of economic studies at the Brookings Institution. “The Fed still has a lot of things they can do to promote lending and influence interest rates on things other than overnight lending,” he said.
Although these tactics are less conventional and come with some risk, the Fed already is considering them. For instance, last month the Fed announced it would purchase mortgage-backed securities to make more loan money available to would-be homebuyers. Mortgage interest rates dropped following the announcement. More recently, it announced in a statement it might buy additional kinds of debt — such as long-term Treasury bills — to help lower interest rates and make more credit available to consumers. Kling suggests the Fed might eventually consider doing the same with consumer credit card debt.
The initiatives Congress is considering, and recently passed the House, on the other hand, fall into the category of fiscal stimulus. Again, there are two main kinds: investment in projects — including infrastructure repair, alternative energy, health care, school aid, unemployment benefits and low-income assistance — and tax cuts to businesses or individual citizens.
While the spending proposals do not appear to have much in common — money to states to help them pay Medicare claims; refurbishing tumbledown schools and bridges; a bump in food stamp aid and unemployment benefits — all have the common goal of either creating new jobs or protecting ones that might otherwise be on the chopping block.
Take school repair, for instance. The construction industry has been one of the hardest-hit by the mortgage crash and its broader economic ripple effect. With money dedicated to fix classrooms, gymnasiums and laboratories, some of the nearly 900,000 unemployed construction workers could go back on the job. Likewise, infusions into states’ pots of Medicare cash would help not only the elderly who rely on this benefit but also would preserve the jobs of all the nurses, home health aides and back-office administrators who manage claims.
Pumping up the amount of income support to unemployed and low-income would have a twofold impact. According to a study released last week by Moody’s Economy, food stamp and unemployment benefits get the highest level of return. Moody’s chief economist Mark Zandi calls this investment “the most efficient way to prime the economy’s pump.” Economists speculate because lower-income citizens need these funds to meet day-to-day living expenses, they don’t save them. Indirectly, the demand fostered by this spending can help keep workers in their jobs.
Tax cuts come in two kinds; they can be doled out either to corporations or individual taxpayers. There are several different ways of giving businesses tax breaks, from letting them write off a greater percentage of the cost of equipment earlier in that item’s lifespan — a technique called accelerated depreciation — to letting companies in the red apply for refunds on back taxes paid in more flush years. Supporters say corporate tax cuts incentivize businesses to invest in their own growth and retain workers that might otherwise be laid off.
Cuts to individuals can come in two forms: as a lump sum directly from the government, such as the Economic Stimulus Act of 2008, or as a reduction in the taxes that are taken out of their paychecks. Unlike 2008, though, the plan agreed upon by the House of Representatives called for a payroll tax cut rather than a lump-sum payout. While getting a check in the mail from the U.S. Treasury may be more satisfying and — one might think — more inclined to be splurged, experts say a greater percentage of a tax cut is spent when it’s siphoned into workers’ paychecks a little at a time. When given a lump sum, recipients tend to spend some and sock away the rest, which defeats the purpose.
Lawmakers want to get as much of that pool of money circulating into the economy, but there are widely diverging theories about the best way to do that. There is no shortage of debate about what economists refer to as the “multiplier;” that is, how much of each dollar invested will end up circulating in the economy. None of the various solutions are foolproof. Cut interest rates too far and run the risk of deflation, which happens when prices and wages go down. Give taxpayers money and they might save it or use it to pay down debt. Cut corporate taxes and those companies might outsource jobs anyway. Invest in schools, hospitals or transportation projects and some of that money could evaporate as a result of corruption or inefficient management, a phenomenon economists refer to as “leakage.”
“In terms of the kinds of stimulus that are on the table, the big debate is between tax-based stimulus and expenditure-based stimulus,” said John Schmitt, senior economist at the Center for Economic and Policy Research. “But even within those camps there are differences.” In a large part because of these divisions, the current stimulus bill passed by the House of Representatives on Wednesday is a combo platter of these options.
*Martha C. White is a freelance journalist in New York. She frequently writes on economics. *
Rhyley Carney
Reviewer
Latest Articles
Popular Articles