Finding a sensible way to stimulate spending

Congress acts: Let's hope Senate comes up with a more targeted plan to revive the nation's economy.

October 29, 2001

JUST ABOUT everyone agrees our stagnant economy needs a shot in the arm. But the stimulus package the House narrowly passed after rancorous debate isn't the right medicine. It costs too much, lasts too long and does too little to address the economy's main problem -- anemic consumer spending.

One month ago, a bipartisan consensus, backed by the president, seemed to endorse a sensible stimulus package of $60 billion to $75 billion, divided roughly equally between tax cuts and added spending. But the House bill would cost about $99 billion next year and $212 billion over the next three years. The lion's share of the cost is for tax cuts -- $112 billion for businesses and $49 billion for individuals over three years.

Many of these tax cuts, including eliminating the minimum tax for corporations and cutting the top tax rate for capital gains from 20 percent to 18 percent, would be permanent.

Since businesses and consumers could take advantage of them at any time, they would do little to spark more spending and investment in the coming months -- when it's needed if the economy is to recover soon. But they would permanently impair the government's ability to pay its bills.

And while the bill would extend tax rebates to some low-wage earners left out of recent refunds, the great bulk of the individual tax cuts would go to the more prosperous. This not only raises serious questions of fairness, but seems to ignore the fact that people of modest means are more likely to spend any added income.

The plan's business tax cuts aren't well designed to promote recovery either. Indeed, in an economy in which consumer spending and confidence are weak and the use of industrial capacity is at its lowest level since June 1983, supply-side incentives can do little to spark recovery. Even with such tax breaks, companies would have little reason to invest or hire more workers until consumer spending revives.

That's why a better approach would be a short-term stimulus package that gets more money to consumers right away -- especially those (such as people recently laid-off) who need it most and are most likely to spend it -- through a better balanced and targeted mix of tax cuts and added spending. Montana Democratic Sen. Max Baucus' one-year, $70 billion stimulus plan is one such proposal, and other senators are sure to offer similar ideas in the coming days.

Such proposals would do more to help the economy now and less to foster future deficits.

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