Stimulus package needs reworking

Our government leaders have awakened to the harsh fact that our economy is sinking into a recession. Unfortunately, the stimulus package negotiated between President Bush and House leaders speaks more to ideological compromise than to empirical evidence and equity.

With growth slowing, foreclosures spiraling and unemployment rising - placing Pennsylvania in 2007 among the top five states in unemployment-insurance filings, with 108,128 - there was a hopeful sign in the swiftness with which President Bush and House Speaker Nancy Pelosi (D., Calif.) moved to craft a package now being considered by the Senate for prompt action.

All agree that the key principles governing an effective stimulus package aimed at increasing consumer purchasing power are three Ts: timely, targeted and temporary. And almost everyone agrees it is critical to put money into the hands of people who will spend it now, rather than bank it for future trips to Europe or stock purchases to enhance portfolios.

But who should be "targeted"? The president's initial plan of one-time tax rebates wisely excluded a make-the-tax-cuts-permanent solution but failed to include tax rebates for more than 25 million low- and moderate-income working families. Pelosi did succeed in negotiating an extension of those tax rebates to all families with earned income. But acceding to the president's ideological bent to shower largesse on the more well-to-do, the rebates for the lowest-income families will be proportionately smaller, even though they are likely to spend more of their rebates than higher-income households.

Lost in the compromise were the two most effective stimuli for the economy: extension of unemployment insurance beyond the current 26-week limit and an increase in food stamps, most of which go to the nation's working poor. Independent institutions such as the Congressional Budget Office and Moody's Economy.com have rated these two remedies as the most effective in boosting the consumer economy and urged implementing them in the immediate short term, in contrast to tax rebates coming later in the year.

Economy.com reports that for each dollar of extended unemployment-insurance benefits, $1.64 in increased economic activity would result; a dollar in increased food stamps would generate a $1.73 hike. Not surprisingly, food-stamp increases are "spent extremely rapidly," according to the CBO. Thus, unemployment insurance and food stamps have the highest economic impact, yet are totally absent from the stimulus package so far.

The package's $50 billion business-tax cut, through the vehicle of "accelerated appreciation," a tax deduction for investments in new equipment, has ideology trumping empirical evidence. Studies of nearly identical tax breaks in 2002, including a 2006 study by the Federal Reserve, found this to have "only a very limited impact . . . in investment spending, if any." A recent Wall Street Journal story quoted a University of Michigan study of a similar 2002 break saying: "It's too small a sliver of investment to really pack that punch." Economy.com finds that a dollar for the depreciation-tax break would generate only 27 cents in increased economic activity.

The ineffective business-tax cut also causes states to lose $4 billion in revenue because of connections between state and federal tax laws. A stimulus should not stress state government revenues and budgets, which further pulls down the economy and also undermines critical state-funded services such as education, transportation and health care. "First, do no harm" is as applicable to government policymakers as it is to medical practitioners.

A more balanced package should:

Relieve pressure on state governments by increasing the share of Medicaid paid by the federal government to pinched state treasuries, thus avoiding eligibility cuts.

Address a variety of problems, including those generated by the housing and foreclosure crises, through flexible block grants.

The president and the House have taken a first step toward ameliorating the oncoming recession. Let's hope the Senate, and the tristate area's six senators, will make the package they are now evaluating more equitable and more fiscally effective.

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Jonathan M. Stein (JStein@clsphila.org) is general counsel at Community Legal Services Inc. in Philadelphia.