If there's a lesson from the recent debacle over an economic
stimulus package, it's this: Republicans need to stop engaging in class
warfare.
Class warfare, as the Republicans have pointed out time and
time again, is when public policy is unduly influenced by the interests of one
group at the expense of everyone else.
Unfortunately, the Republican leadership has been guilty of
such hypocrisy in its negotiations over individual tax rebates in the economic
stimulus package, which the Senate approved yesterday. First there was a talk
of making any legislation contingent on extending President Bush's tax cuts for
the wealthy. Then the Republicans sought to kill proposals to extend government
checks to the poor, while demanding tax rebates for wealthy Americans. Now they've
just stamped out an effort by Senate Democrats to lengthen unemployment
benefits.
So, how is this class warfare? An effective stimulus
package, according
to economists ranging from Ben Bernanke to Martin Feldstein to Lawrence
Summers, should be timely, temporary, and targeted. Targeting the stimulus
means putting money in the hands of poor and middle-income households. They're
more likely to use that money to buy things rather than saving it or using it
to pay down debt. (See these articles by economists Paul Krugman
and Mark Zandi
for more on this point. For some contrarian views, see
this summary of recent research on tax rebates — though it's axiomatic in
social science that you shouldn't put too much faith in surveys of what people say they will do in the future.)
The legislation that both houses of Congress approved will
give some benefits to the poor — a $300 tax rebate check to individuals with at
least $3,000 in income — but many will not receive the $600 maximum rebate for
individuals or $1,200 maximum for couples, plus $300 per child, because they do
not pay enough income tax. (This is also true for certain segments of the near
poor, the group that Katherine Newman and I study in our book The Missing Class.)
In passing their own version of the legislation yesterday, the Senate also extended
tax rebates to Social Security retirees and veterans with disabilities, though
as for the poor the benefit will be just $300.
Among the poorest Americans, those in the bottom income
quintile, only
71 percent have savings or checking accounts. Among families one quintile
above poor, 89 percent do. As for the rest of Americans, their rate is almost
100 percent.
In other words, poor people save less. Any money that finds
its way to these households is more likely to go toward buying things that people
need. And since consumption accounts for more than two-thirds of the nation's
economic activity, people — and the more people, the better — need to start
buying things if the economy is going to pull out of its downward spiral.
Affluent families, on the other hand, tend to use a smaller
portion of their incomes to make purchases — at a certain point, there's not
much more to buy — and so any windfall that comes their way ends up in a bank
or stock portfolio. While good for their retirement prospects, this kind of
asset-building won't do as much to grow the economy as going out and buying
food, clothing, electronics, and other goods that keep companies in the black
and keep workers employed.
To be effective, economic stimulus also has to be timely.
That means relief should begin today — not four or more months down the road,
which is when the proposed legislation's rebate checks are expected to go out. Yet
temporary extensions of food stamps and unemployment insurance could have taken
effect almost immediately. It's a matter of instituting simple rule changes for
pre-existing benefits, as opposed to putting in motion a bureaucratic juggernaut
of one-time tax rebates.
What's more, increases to food stamps and unemployment insurance
would have been, by definition, targeted at the poor and unemployed, who again are
the most reliable spenders and thus the key to raising levels of consumption
and growing the economy. In fact, this analysis
by economist Mark Zandi finds that jobless benefits and food stamps are even more
effective than tax breaks in growing the economy.
Instead of following this economic logic, the Republicans in
Congress have engaged in class warfare. They rebuffed any action on food stamps
and now they've blocked an extension of unemployment benefits. They've consistently
tried to steer the legislation toward the interests of the wealthy. (Here I'm
talking specifically about the debate over individual tax rebates; the Senate proposals
also included a variety of tax breaks for the coal industry and other
businesses, so they had their fill of pork cooked up on the other side of the
aisle, too.)
Economic stimulus is not about tax cuts for all, and especially
not the wealthy. It's about promoting consumer spending, and it should be seen
for what it is: an investment, much the same way as we invest in roads and
schools. By investing in working families who will head out to supermarkets and
department stores with their rebate money, we can boost economic activity and pull
the markets out of their doldrums. But that kind of investment should be made
according to economic science, not the special interests of politicians.
Never mind that these families pay their share of sales taxes
and Social Security and Medicare taxes — in fact, more than their share,
considering that regressive sales taxes swallow a larger chunk of poor
households' incomes than they do for more affluent Americans, and Social
Security taxes only apply to the first $100,000 of income. The stimulus money
should go to these families who most need it and who are most likely to spend
it.
Unfortunately, the Republicans held their ground in the
class war. Poor and middle-class families will be shortchanged by the approved
legislation, and the quickest-acting methods of stimulus — food stamps and
jobless benefits — remain in legislative limbo. (Democrats say they'll take up
the cause later, but there's no reason for Republicans to sign on now that they
got their tax rebates.) So, while the economy continues to sour, struggling
families will still be waiting by their mailboxes come summer for that all-too-light
check in the mail.
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