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January 22, 2008
Economic stimulus
With the financial markets in trouble and the Fed slashing interest rates, the drumbeat for an economic stimulus packing is reaching a fevered pitch. So far, the consensus has coalesced around Larry Summer's three T principles: timely, targeted and temporary. Usually, this makes good economic and political sense. Politically, it avoids a long-drawn out debate over economic fundamentals - in this case, over the potential showstopper on extending the Bush tax cuts. If everyone agrees not to raise structural issues, a package can be passed quickly (although that is not preventing last minute wrangling - see Joint Economic Push Is Both Parties' Goal - WSJ.com). In "normal" times, such a 3-T approach would also make economic sense. If this were a cyclical downturn, the standard Keynesian economic stimulus of pumping up demand would be appropriate.
By the way, I'm not sure that one of my favorite stimulus elements will make it into the package. As I noted earlier, the number of involuntary part time workers is increasing as well as unemployed. Few of the proposals will help the worker whose hours have been reduced. The answer to that problem is a reducing or "holiday" in payroll taxes. With a cut in the amount of withholding for payroll taxes, all workers, including part time, would get an immediate boost. There is a downside to this mechanism, however. As the CBO report points out, such a payroll tax holiday is more difficult to administer compared to other options. I would argue that such a difficulty is worth the effort if the appropriate target is reached. And in this case, not dealing with the increase in part time workers constitutes missing the target.
But here is the biggest worry: what if this is not a cyclical downturn or a correction? What if the problems are structural? That is the worry. We may find that the stimulus package falls far short of what is needed. Will there be anything in the stimulus package to help homeowners facing default? How about dealing with the long term structural problem of households using rising home equity to finance living standards? What about the shift in income patterns and the stagnation of incomes for many workers? The rising prices of oil and the fall of the dollar? The continued growth of the trade and budget deficits?
And what about the major structural issues facing the I-Cubed Economy: the changing nature of the production process? None of the stimulus discussions will even begin to get at these matters.
Yes, I agree, something needs to be done quickly to stimulate the economy. And the discussions over the structural issues will take more time. But if we don't take this opportunity to start those discussions, we may find that they never get started. Nothing jump starts the discussion like a crisis.
Posted by Ken Jarboe at January 22, 2008 10:25 AM
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