The Wall Street Journal-20080125-Re-Election Stimulus
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Re-Election Stimulus
Nothing concentrates a politician's mind quite like a 30% approval rating, and for proof look no further than the "stimulus" package agreed to yesterday by both ends of Pennsylvania Avenue. We doubt it'll help the economy much, if at all, but then the real point of this exercise is to stimulate voters into absolving the political class of any blame for a recession.
The result is an almost perfect political stimulus: a one-year "middle-class tax cut" for Americans in the most populous demographic group, a few tax goodies to sweeten the cash flow of certain current businesses, and a boost to the business of those world-class lobbying firms and campaign contributors, Fannie Mae and Freddie Mac.
For the sake of bipartisan accord, the White House dropped any demand to make its previous tax cuts permanent, while House Democrats gave up for now on some of their spending plans, such as increasing the incentive to stay out of work longer by extending unemployment benefits. Senate Democrats will try to add the latter.
The GOP also agreed to make the tax rebates of as much as $600 per individual filer and $1,200 a couple "refundable," which means they will go to 35 million voters who don't pay income taxes. Yes, many of those people do pay the Social Security payroll tax, though for most that is already offset by the also-refundable earned income tax credit. So this will be a bonus federal subsidy payment. And by the way, if you make more than $75,000 a year ($150,000 for a couple), your tax cut starts to vanish fast, apparently because you are already too productive to deserve "stimulation." Congratulations.
As for the economics, oh my. The most this temporary tax cut will do is goose consumer spending for a quarter or two this year. Since the IRS is saying it won't be able to cut the checks until midyear, any recession might well be over, if it even begins. The money to pay for these rebates has to come from somewhere, which means from other taxpayers or from bondholders who lend money to the Treasury. Either way, Congress and the White House are taking money from someone to pass out to someone else. The income effects are thus a wash, as the economists put it, while the substitution effects (higher taxes on the best income producers to finance consumption among the lowest) are negative.
More generous expensing and depreciation rules for 2008 will at least help the cash flows of many businesses. And this will help investment this year, though in part by borrowing that investment from next year. Then again, the election is this year.
The nearby chart shows what happened to the economy after the last tax rebate exercise in 2001. (See accompanying illustration -- WSJ January 25)Modest growth resumed for a while, but that "stimulus" did little to lift the animal spirits of business or to spur more investment and job growth. The big turnaround didn't take place until after the 2003 tax cuts, which made immediate and long-term (multi- year) reductions on investment and marginal income tax rates.
As for Fannie and Freddie, the troubled mortgage giants will be allowed to raise the limit on loans they can buy to $625,000 from $417,000. The loan limit for the Federal Housing Administration will rise even higher, to $725,000 from $362,000. The feds are thus extending implicit and explicit federal loan subsidies to a far larger pool of mortgage borrowers. This means that Congress and the White House will be providing mortgage subsidies to some of the same people they consider too "rich" to receive tax relief. Go figure.
"I got run down by a bipartisan steamroller," said Treasury Secretary Hank Paulson, in explaining the new housing limits. This means Fannie and Freddie now have a political blessing to expand their market share, despite their ferocious resistance to tighter regulation after their multi-billion-dollar accounting frauds.
Perhaps the best that can be said of these Beltway antics is that they won't do much harm -- the housing credit guarantees aside. Americans lucky enough to qualify should enjoy this little windfall while they can, because the politicians are already planning to take it all back next year. After they're re-elected.
