Stimulus plan not based on sound economics

The recent fight over a stimulus package to revive the economy speaks volumes about the current priorities of Republican leadership. Republicans often portray themselves as the party of free markets. Government – either through subsidies or direct spending – shouldn’t pick winners, offer incentives, or redistribute incomes. Yet the new stimulus package applies sticks and carrots to different segments of the population.

Carrots, in the form of tax rebates, and tax incentives go to the middle- and even upper-middle-class taxpayers. Most surprisingly, new tax breaks for corporations are included. Senate Democrats persuaded Republicans to add senior citizens and disabled veterans. Nonetheless, even in the face of a contracting job market, the unemployed were stiffed.

Extending benefits, we are told, discourages the unemployed from seeking new jobs. Yet if unemployment benefits supposedly encourage slothful behavior, don’t special tax credits for businesses risk encouraging imprudent or even fraudulent business investment? Didn’t low interest rates, a Federal Reserve bullish first on stocks and then on housing, and decades of Fed bailouts of imprudent banks and investment funds encourage excesses by banks, brokers and hedge fund managers?

Maine’s two Republican senators are to be commended for supporting the extension of unemployment benefits, but the vote also indicates how marginal their voices are within the current Republican Party and how completely that party is captured by a narrow corporate agenda.

Unemployment benefits should have assumed a central role in any stimulus package designed to meet the president’s own criteria: timely, effective and short-term. The best stimulus package would have assisted the unemployed, funded state government programs currently being disabled all over the country, and limited direct rebates to poor and working-class citizens.

Republican leaders assume that unemployment would not be a problem without the corrupting influence of unemployment benefits. Yet levels of unemployment have already started to increase among those who have exhausted their benefits. Even faced with the tough love of lost benefits they are not finding jobs. The number of long-term unemployed – those who have exhausted their benefits – is already greater than during the 2002 recession.

Numerous studies also indicate that as the economy slows and overall unemployment rises, the percentage of long-term unemployed rises disproportionately. This suggests that especially in a sluggish economy, withholding benefits hardly gets workers back in new jobs or restores economic health.

Recovery from the current economic stagnation will likely require far more than lower interest rates from the Fed and one relatively small and poorly targeted stimulus package.

To credit the Federal Reserve and the Bush tax cuts for recovery – such as it was – from the 2002 recession requires a selective memory. Military spending, which acts at least in the short term as a job-creating public works program, was dramatically increased (just as World War II might be seen in economic terms as a massive public works program that ended our worst depression).

In addition, in March 2002, with long-term unemployment at an even lower level than it is now, Congress extended unemployment benefits beyond the 26-week period.

The libertarian wing of the Republican Party would have preferred no stimulus package at all. It assumes reductions in consumer and investment spending will soon be accompanied by declines in the interest rate and renewed business investment. These market fundamentalists assume a close and mutually reinforcing fit between the cycles and feedback mechanisms that govern economies.

For my money, I opt for the Keynesian quip that in the long run we are all dead. There are circumstances in which we can’t and shouldn’t wait for markets to work it out.

Even most Republicans in practice don’t wait. But they are outrageously selective for whom they spare the whip of the market. Extension of unemployment benefits is justified both in macroeconomic and humanitarian terms. Many rebate checks going to middle- and upper-middle-class citizens will be banked or used to pay off credit card debt. No jobs will be created.

The long-term unemployed, however, spend benefits on necessities and thereby increase demand for other goods and services.

Many Republicans also argue that any federal funding to cushion state spending reductions represents caving in to special interests. Yet when the Maine Legislature cuts funding for Medicaid and human services, it disables programs that have been vetted by elected state leaders, are immediate job creators and often reduce eventual taxpayer burdens. How such programs can be cast as special interests while tax credits for business are treated as part of the landscape escapes me.

John Buell is a political economist who lives in Southwest Harbor. Readers may reach him at jbuell@acadia.net.