Stimulus act is better politics than economics

Raymond J. Keating

February 25, 2008

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Who says Republicans and Democrats in Washington can't get along?

Unfortunately, when they do, it often doesn't work out so well for the rest of us.

Take the so-called stimulus package passed by Congress and signed into law by President George W. Bush earlier this month.

Both sides of the political aisle agreed that the economy is in trouble and something had to be done. So we wound up with the Economic Stimulus Act of 2008. The bill features tax rebates and temporary tax breaks for business investment.

On the afternoon of Feb. 7, it passed the Senate by a vote of 81-16. New York's Sen. Charles Schumer voted "yes," while Sen. Hillary Rodham Clinton, apparently on the presidential campaign trail, did not vote. A few hours later, the House of Representatives gave its approval by 385-35. Long Island's five members - Gary Ackerman (D-Jamaica Estates), Tim Bishop (D-Southampton), Carolyn McCarthy (D-Mineola), Peter King (R-Seaford) and Steve Israel (D-Huntington) - were all on board.

But in the end, this legislation is more about political stimulus than stimulating the economy. It was an opportunity to show politicians in action. But as is so often the case in government, a flurry of activity does not mean something is actually getting done.

Government checks dropping from the sky is merely a case of income redistribution; in effect, a handout. Tax rebates didn't work in the mid-1970s or in 2001, and they won't this time. Meanwhile, the impact of the investment tax breaks for business will be severely limited because they're only temporary. At best, the timing of some investments will shift.

Beyond the stimulus, many on both sides of the political aisle, along with various TV talking heads, also agree that the Federal Reserve should be trying to juice up the economy through interest rate cuts and added liquidity.

But the purpose of monetary policy is to keep inflation low. It is not a magical means for manipulating economic growth. And since consumer price inflation during the past three months has been running at a red-hot annualized rate of 6.8 percent, the Fed needs to get refocused on getting inflation under control. Low inflation, of course, helps consumers and investors.

So if the much-touted stimulus plan isn't going to do it, and neither is the Fed, what can be done on the policy front for the economy? The key is to boost incentives for work, investment and entrepreneurship. That means reducing regulatory costs and tax rates. And such changes must be permanent to have a real impact.

How about the Fair and Simple Tax Act proposed late last month by Rep. David Dreier (R-Calif.)? Rep. Peter King is one of the original co-sponsors.

The bill would simplify the personal income tax by reducing six brackets to three, with the top rate cut from 35 percent to 30 percent.

The capital gains tax rate would fall from 15 percent to 10 percent, with gains indexed for inflation. And the corporate tax rate would drop from 35 percent - one of the highest rates among developed nations - to 25 percent. In addition, the death tax would be thrown out, and the alternative minimum tax exemption would be adjusted for inflation and made permanent.

This is sound tax policy that clearly would benefit the economy. The returns on starting up, expanding and investing in businesses would be enhanced. When business invests, production expands and jobs are created. In turn, individuals and families are confident and keep spending their consumer dollars.

So, why are we stuck with a bogus stimulus package, rather than something economically meaningful? Well, substantive tax relief clearly is not something that interests the Democratic majority in Congress. So much for bipartisanship. We'll have to wait to see how the November elections turn out. In the meantime, get used to economic sluggishness.