Democrats Sell Their Souls [Again]

[Scroll down for Krugman] In a cave-in that was as swift as it was total, the congressional Democratic leadership reached agreement with the White House Thursday on an economic stimulus plan that is limited to tax cuts and provides no new funding for unemployment compensation, food stamps or other social programs, or for public works.

The agreement came after three-way talks between House Speaker Nancy Pelosi, House Minority Leader John Boehner and Treasury Secretary Henry Paulson, representing the Bush administration.

Senate Majority Leader Harry Reid backed the plan, which is to be introduced into the House first, but said there could still be significant changes in the details once it reaches the Senate.

The plan is the same size proposed by Bush January 18: about $150 billion, divided between $100 billion in tax rebates for individuals and $50 billion in tax incentives for business.

There are additional provisions related to the mortgage market crisis, including expanded authority to federal agencies to help refinance mortgages.

The tax rebates will be focused largely on middle-income families, with much smaller amounts for the lower-income working-class families, about 40 percent of the total, who do not pay income tax but have substantial amounts deducted from their paychecks for Social Security and Medicare.

Those making at least $3,000 a year would be eligible to receive a check for $300. Those who pay income tax (earning approximately $50,000 a year and up for a two-income couple), would receive $1,200 rebates per family, or $600 for an individual, plus an additional $300 per child.

These rebates would be phased out gradually for families with incomes between $150,000 and $178,000 a year (or for individuals with incomes between $75,000 and $87,000). Wealthier individuals and families would receive no rebate.

Congressional Democrats hailed the agreement because the number of families receiving rebates rose from 82 million under the original Bush plan to 117 million by adding 35 million lower-income families. These families would receive rebates totaling $28 billion.

But in return for this “concession”—clearly envisioned as a bargaining chip by the White House when it issued its plan—Pelosi agreed to drop any extension of unemployment and food stamp benefits as well as proposed funding increases for low-income heating assistance and state Medicaid programs.

Even some of Pelosi’s fellow House Democratic leaders were taken aback by this abrupt abandonment of traditional social safety net programs, particularly unemployment compensation, which has been extended from the standard 26 weeks to 39, 52 or even 65 weeks during many US recessions.

According to reports from the Labor Department, more than 1.4 million unemployed workers had been without a job for more than 27 weeks as of November. This is twice the level of long-term unemployment that existed before Bush took office in 2001.

Pelosi acknowledged the anger which her action would provoke, but dodged a reporter’s question about what she did not like about the stimulus plan. “Let us praise this package for what it does and not disrespect it for what it does not.”

This formula perfectly expresses the combination of impotence, condescension and political arrogance that the congressional Democratic leadership embodies.

She told the news conference on Capitol Hill, “First and foremost, the stimulus package will put money in the hands of hardworking Americans.

"This is a middle-class initiative to strengthen the middle class and to those who aspire to be in the middle class.”

In other words, low-paid workers, the disabled, the unemployed, the elderly, young people all need not apply.

Stimulus Gone Bad [Paul Krugman]

House Democrats and the White House have reached an agreement on an economic stimulus plan. Unfortunately, the plan — which essentially consists of nothing but tax cuts and gives most of those tax cuts to people in fairly good financial shape — looks like a lemon.

Specifically, the Democrats appear to have buckled in the face of the Bush administration’s ideological rigidity, dropping demands for provisions that would have helped those most in need. And those happen to be the same provisions that might actually have made the stimulus plan effective.

Those are harsh words, so let me explain what’s going on.

Aside from business tax breaks — which are an unhappy story for another column — the plan gives each worker making less than $75,000 a $300 check, plus additional amounts to people who make enough to pay substantial sums in income tax.

This ensures that the bulk of the money would go to people who are doing O.K. financially — which misses the whole point.

The goal of a stimulus plan should be to support overall spending, so as to avert or limit the depth of a recession.

If the money the government lays out doesn’t get spent — if it just gets added to people’s bank accounts or used to pay off debts — the plan will have failed.

And sending checks to people in good financial shape does little or nothing to increase overall spending. People who have good incomes, good credit and secure employment make spending decisions based on their long-term earning power rather than the size of their latest paycheck.

Give such people a few hundred extra dollars, and they’ll just put it in the bank.

In fact, that appears to be what mainly happened to the tax rebates affluent Americans received during the last recession in 2001.

On the other hand, money delivered to people who aren’t in good financial shape — who are short on cash and living check to check — does double duty: it alleviates hardship and also pumps up consumer spending.

That’s why many of the stimulus proposals we were hearing just a few days ago focused in the first place on expanding programs that specifically help people who have fallen on hard times, especially unemployment insurance and food stamps.

And these were the stimulus ideas that received the highest grades in a recent analysis by the nonpartisan Congressional Budget Office.

There was also some talk among Democrats about providing temporary aid to state and local governments, whose finances are being pummeled by the weakening economy.

Like help for the unemployed, this would have done double duty, averting hardship and heading off spending cuts that could worsen the downturn.

But the Bush administration has apparently succeeded in killing all of these ideas, in favor of a plan that mainly gives money to those least likely to spend it.

Why would the administration want to do this? It has nothing to do with economic efficacy: no economic theory or evidence I know of says that upper-middle-class families are more likely to spend rebate checks than the poor and unemployed.

Instead, what seems to be happening is that the Bush administration refuses to sign on to anything that it can’t call a “tax cut.”

Behind that refusal, in turn, lies the administration’s commitment to slashing tax rates on the affluent while blocking aid for families in trouble — a commitment that requires maintaining the pretense that government spending is always bad.

And the result is a plan that not only fails to deliver help where it’s most needed, but is likely to fail as an economic measure.

The words of Franklin Delano Roosevelt come to mind: “We have always known that heedless self-interest was bad morals; we know now that it is bad economics.”

And the worst of it is that the Democrats, who should have been in a strong position — does this administration have any credibility left on economic policy? — appear to have caved in almost completely.

Yes, they extracted some concessions, increasing rebates for people with low income while reducing giveaways to the affluent. But basically they allowed themselves to be bullied into doing things the Bush administration’s way.

And that could turn out to be a very bad thing.

We don’t know for sure how deep the coming slump will be, or even whether it will meet the technical definition of a recession.

But there’s a real chance not just that it will be a major downturn, but that the usual response to recession — interest rate cuts by the Federal Reserve — won’t be sufficient to turn the economy around. (For more on this, see my blog at krugman.blogs.nytimes.com.)

And if that happens, we’ll deeply regret the fact that the Bush administration insisted on, and Democrats accepted, a so-called stimulus plan that just won’t do the job.

tags: krugman  stimulus  slump  economy  capitalism  democrats  

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