Time to Get Serious
By Augustine Faucher
11/15/01 8:00 AM ET
There's a capital in disarray: the supreme leader has left, the political factions are at each other's throats, and economic conditions continue to deteriorate. Kabul? I wish. Right now, there are serious problems in Washington, D.C. It's time for President Bush to knock some heads and get Democrats and Republicans together on a serious fiscal stimulus package.
It's not too tough to figure out what's going on here. Prior to September 11, the economy was just barely expanding, and the terrorist attacks were enough to push it into recession. Real GDP fell in the third quarter, and will continue to fall through the first quarter of 2002. Unemployment has already increased to 5.4%, the highest level since the end of 1996, and will likely peak at above 6%. Consumer confidence is down, and business investment remains terrible. This is an economy that needs some stimulation. The Federal Reserve is doing what it can, with continued interest rate cuts, but more is needed. The federal government needs to act.
Washington was on its best behavior immediately after the attacks. President Bush asked for $20 billion in emergency aid in the immediate aftermath of the attacks, Congress responded on a bipartisan basis with $40 billion, and the president quickly agreed. Also, both Republicans and Democrats were quick to agree on an emergency $15 billion bailout of the troubled airline industry. Now though, that bipartisanship is collapsing.
Both Republicans and Democrats agree that the economy needs a stimulus package. Unfortunately, they are very far apart on what that package should be. In late October, the House passed a Republican stimulus package almost exclusively along party lines. In the Senate, the Finance Committee passed a Democratic alternative on a party line vote last week. (Senator Jim Jeffords, an independent, also voted for the bill.) There's little in common in the two bills, and prospects for compromise do not look good.
Yesterday morning, Senator Phil Gramm (R-Texas) threatened a filibuster on the Democratic stimulus package in the Senate. Curiously, Senator Gramm is an economist: he should know that the last thing we need now is delay. Also, on Monday, the Chairman of the House Ways and Means Committee rejected House-Senate talks on a compromise.
Both of the House and Senate bills have serious flaws. Republicans see the stimulus package as a way to pass business tax cuts that were excluded from this summer's tax bill. The most egregious example is a retroactive reduction in the corporate alternative minimum tax. This provision would simply refund billions of dollars to large corporations, like IBM and GE. As it is not tied to any sort of behavior and is not incentive driven, it would have little direct impact on investment decisions, and would provide little economic stimulus.
Other components, while slightly less offensive, are still payoffs to interest groups rather than serious attempts at stimulus. The Democratic Senate bill also has its absurdities. The Finance Committee dropped the most easily ridiculed component, a federal subsidy for buffalo meat. But other agricultural subsidies and billions of dollars for Amtrak will do little to give the economy the quick boost it needs.
Meanwhile, President Bush has been largely absent. He has made a few suggestions about what a package should look like, and called on Congress to send him a bill by the end of November. Admittedly there's a war on, and right now he's meeting with Russian President Putin in Texas. However, President Bush needs to push Republicans and Democrats to adopt a serious bill. In the administration's one effort along these lines, Treasury Secretary O'Neill called the House bill "show business." He's right, of course, but was pilloried by House Republicans and hasn't been heard from since.
The economy is in recession because demand (both consumer and investment) is weak. Now is not the time to be promoting supply-side remedies. The stimulus package should also be explicitly temporary, so that it does not do long-term damage to the federal budget. There are many good proposals that meet these criteria: rebates for low-income taxpayers who did not benefit from the earlier rebates over the summer (already included in both the House and Senate bills); increased aid for state and local governments, who are facing severe budget crunches; a temporary reduction in payroll taxes; and temporary investment tax credits, to encourage businesses to invest immediately.
It is now time for President Bush to step up and broker a compromise. If he expends his political capital, and Congress acts soon, it might not be too late to prevent a deeper downturn. However, if the politicians continue to push for special interests and refuse to compromise, they should be held accountable.
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