Why the Senate Has it Wrong on the Stimulus Bill

February 8, 2009 |  Tagged , , | Comments Off on Why the Senate Has it Wrong on the Stimulus Bill

The House and the Senate have each produced stimulus bills this week, but there are marked differences between the two bills.  The NYT reports:

Congress is racing to finalize the legislation this week, with the price tag for the Senate plan now only slightly more than the $820 billion measure adopted by the House. Both plans are intended to blunt the recession with a combination of quick-acting tax cuts to help increase spending by consumers and businesses, and slower long-term government spending on public works projects and other programs to create more than 3 million jobs.

But the competing bills now reflect substantially different approaches. The House puts greater emphasis on helping states and localities avoid wide-scale cuts in services and layoffs of public employees, while the Senate cut $40 billion of that type of aid from its bill.

The Senate plan, reached in an agreement late Friday night between Democrats and three moderate Republicans, focuses more heavily on tax cuts, provides far less generous health care subsidies for the unemployed and lowers a proposed increase in food stamps. To help allay Republican concerns about cost, the Senate proposal even scales back President Obama’s signature middle-class tax cut.

At the same time, the Senate plan creates $30 billion in tax incentives to encourage Americans to buy homes and cars within the next year.

The House has the right idea. The Senate, not so much. The states need money, desperately, and the House bill provides it. The Senate bill, again, not so much. The Senate plan is focused on providing relief through tax cuts, but as several viewers on CNN pointed out earlier today while I was watching, how does a tax cut help someone who doesn’t have a job?

The short answer: It doesn’t.

Tax cuts in theory, and this is true to a degree during normal economic times, will provide more money for private firms to invest in job creation. The problem is that these aren’t normal economic times, and the firms are just as likely to behave as consumers are currently. All you have to do is look at how firms that received bail-out money behaved to understand this. The money was given to them to increase lending, but instead the firms used it to fix their balance sheets and subsequently there was not the increase in lending Congress planned when they authorized the funds. Firms receiving tax cuts will save that money rather than invest. Everyone, corporations and citizens alike, are behaving in their individual self-interest, which tells them in a tough economy they should save. This is a big problem at the macro level, because with everyone saving, no one is spending and because no one is spending companies aren’t hiring. It’s that whole vicious circle idea. Even more egregious in the Senate bill is the cut in health care subsidies for the unemployed and reduction in food stamps. The government played a role in creating this mess and now is essentially telling the people hurting the most, the unemployed, “you’re on your own, sorry.” This is quite simply, wrong.

Finally, the Senate plan includes $30 billion in tax incentives to encourage Americans to buy homes and cars in the next year. There’s nothing like not learning from recent history. A major reason the economy is in the tank right now is the collapse of the housing market. Why did the housing market fail? To make a very complicated and long story rather short and simple: the government encouraged people who couldn’t afford homes to buy them anyway, and then, when firms used predatory lending practices to lure these folks in to sign up for loans that there was no way they could pay off down the line, the government did nothing to stop it. Wall Street firms created securities backed by these ill-advised loans, then the folks who bought homes they could not afford defaulted on those mortgages and the values of those securities plummeted leaving investment banks and those who put their faith in them in shambles.

So, what is the Senate’s grand solution for fixing the housing market? Propping it up artificially by encouraging people, in the worst of economic times, to take on mortgages. That is to say, to repeat the same mistakes from which we’re currently trying to recover.

Photo courtesy of Flickr user Storm Crypt.

The content is written in inverted pyramid influential source style, with the most important points in the first two or three paragraphs.


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