ARCHIVE - December, 2001

Economic Stimulus or Political Agendas
Robert McNown, Department of Economics

On November 26 the National Bureau of Economic Research made official what most already knew: the U.S. economy is in a recession. According to the official arbiters of business cycles, this recession began last March, long before the shocks emanating from the tragic events of September 11. Attempts by the Federal Reserve to bolster economic activity by slashing short term interest rates have had little perceivable impact on economic activity.

In this context the administration and each branch of Congress have prepared fiscal stimulus proposals to supplement the monetary policies of the Fed. All three plans extend this year’s tax rebates to previously ineligible households, and all include various forms of business investment incentives. Beyond these points of agreement, there are major differences among the proposals. The administration’s plan and the bill passed by the House are weighted towards tax reductions for corporations and an acceleration of the current schedule of personal income tax cuts. The proposal from the Senate Finance Committee Chair represents the Democrats' position, incorporating expanded funding of unemployment insurance, Medicaid, and subsidies of health insurance for laid off workers.

The most effective programs will alter incentives for businesses to increase investment and employment or boost household consumption expenditures. The President’s plan and the House bill call for elimination of the Alternative Minimum Tax for corporations. Rescinding this tax would provide substantial subsidies to specific corporations, without altering investment incentives. This proposal has obvious political objectives, with very weak economic foundations. By contrast these same plans include a proposal to allow partial expensing of business investment, directly altering the cost of investment activity to create clear stimulative effects.

Changes in taxes on households are also proposed. The President and the House want to move forward to January 2002 the income tax cuts that are scheduled to apply in 2004 and 2006. Previous permanent tax rate reductions in the 1960s and the 1980s produced substantial economic stimulus, and this proposal is likely to be effective as well. However, these scheduled cuts apply only to those in the top 25% of the income distribution. A cynical interpretation of this plan is that it would solidify future tax cuts that might soon be rescinded in the light of less rosy future economic scenarios.

One change common to all three proposals is a tax rebate for those households that did not qualify for full rebates earlier this year. These tend to be lower income households who are likely to spend large proportions of their windfalls. This is clearly a policy that many could support in terms of both equity and effectiveness.

Other proposals, such as a payroll tax holiday, are coming forward as the three groups attempt to converge on compromise legislation. Effective policies will provide incentives for new investment, boost spending by households, or inject government expenditures quickly into the economy - simple principles that should be incorporated in the final design of a stimulus package.

IN THIS ISSUE:

The opinions expressed in these articles are those of the authors, and do not represent those of the Boulder Faculty Assembly, CU faculty at large, or the University of Colorado.

Responses to these articles are welcome. We are developing our capacity to collect responses on-line. In the meantime, please send your comments via e-mail to Thomas.Mayer@Colorado.edu.

Click here for the names and contact information of the membership of the BFA Communications Committee.