Editorial: Don't expect miracles from stimulus deal

  • Updated: January 24, 2008 - 6:40 PM

History shows that rebates are often used to pay off debt.

The economy may or may not be heading into a recession, but clearly many Americans are already feeling the pain of one. To keep the economy from sagging further, a consensus appears to have formed around the idea that the federal government should some how "stimulate" the economy through some combination of increased spending and tax cuts.

But even in the best of times, economic stimulus plans through increased federal spending or lowered taxes can be a fool's errand. With presidential and congressional election campaigns in full swing, this is hardly the best of times.

Previous efforts to boost economies at or near recession levels have generated mixed results and often produced little more than sops to favored constituents. It's difficult to imagine $150 billion in spending and tax cuts that both satisfies political imperatives and provides real support for the economy.

The tentative deal announced yesterday by congressional leaders and the White House would give most taxpayers refunds of $600 to $1,200, with more for those with children.

While everyone appreciates a windfall, studies have shown that taxpayers who are wary of rough economic times ahead have more often than not pocketed the checks or paid off credit card debts and other bills rather than spending the money on new purchases that can spark the economy.

Similarly, temporary tax cuts for businesses -- there are $50 billion in business tax cuts in the new stimulus package -- may benefit corporate bottom lines, but it's not clear that they will immediately lead to higher employment domestically.

Prudent economic policy would have built a budgetary cushion during the past six "fat" years. Instead, we built up debt, and any economic stimulus package will heap more of it onto the backs of future taxpayers.

Finally, economic stimulus proposals can't solve the two fundamental problems facing the U.S. economy: a credit crisis that has dampened lending activity and a housing slump. Both will take time to unwind, and their resolution will not be accelerated by any stimulus measures. Housing prices will continue to fall until they reach a historically consistent level, and financial firms need to unwind their poor credit decisions of the last several years.

The looming potential recession and the consideration of economic stimulus plans has had the side benefit of steering the presidential campaigns toward a discussion of economic policy, which until recently had been sorely neglected. Predictably, however, most of the candidates have used the opportunity to appeal to their bases with warmed over paeans of liberal or conservative orthodoxy, instead of creative and sound economic policy.

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