May 27, 2008
Dean Baker
Truthout, May 27, 2008
See article on original website
The last week provided new evidence the economy remains weak and the recent spate of predictions of a short mild non-recession will be proven wrong. That means it is time to get out in front of the herd of surprised economists and start talking about another stimulus package.
The first stimulus package was focused on tax breaks. Just under $50 billion went to businesses. This was a political payoff to President Bush and his backers to avoid a veto; no one expected these tax breaks to have any immediate effect on the economy. There is a substantial body of economic research that shows such tax breaks have little impact on business investment.
Another $100 billion was paid out to individuals in the form of $600 per person tax rebates. Based on the experience with a similar set of rebates in 2001, there was reason to hope much of this money would be spent, giving an immediate boost to the economy.
However, there is one very important difference between the economy today and the economy in 2001, when the last rebate checks were mailed out. In 2001, house prices were rising rapidly. This meant tens of millions of homeowners were seeing the equity in their home increase, and, therefore, would feel comfortable spending their rebate check.
We are in the opposite situation today. House prices are plummeting at double-digit rates. More than ten million homeowners already have mortgages that exceed the value of their homes, and tens of millions of others are seeing the equity accumulated over a working lifetime vanish in months.
Add soaring gas and food prices to plunging home prices and you do not get a situation in which consumers will be anxious to spend. Most of the rebate checks will be used to pay down debts or replenish savings.
This means we have to look elsewhere for stimulus. Some items are simple. The Senate has already voted to extend unemployment benefits by 13 weeks. Hopefully, this will get into law. Congress could also increase food stamps and home heating oil subsidies, thereby helping low-income families cope with the sharp increase in food and energy prices. Revenue sharing can also help state and local governments meet their budgets without raising taxes or laying off workers in the middle of a recession.
These are good forms of stimuli that can increase demand while addressing immediate needs, but we should also think of the long-term. Specifically, we should find forms of stimuli that can get the economy on a more energy-efficient path.
At the top of this list is expanding a tax credit that already exists in current law. We can give homeowners and businesses a 30 percent or 40 percent tax credit for making energy-conserving improvements to their homes or businesses. The current law provides a 10 percent tax credit for such improvements.
If the credit were made more generous, and the cap was raised to $2,500, hard hit contractors would immediately begin to chase down business, putting construction workers back to work.
But this is just a first step. The government can provide grants to public transit agencies in exchange for reducing fares. This would effectively give people a tax rebate every time they took public transit, putting money in their pocket for not driving.
We should also begin to lay the infrastructure for an energy-efficient economy. This will mean more efficient power plants and transmission lines, increased used of trains and mass transit, and, of course, promoting alternative energy sources. The transformation needed to limit the damage from global warming will take decades and certainly goes well beyond the course of a stimulus package. But a good stimulus package will not only provide a temporary boost to the economy, it can also help set us on this course toward an energy-efficient economy.
