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What to do with all that stimulus money

Lawmakers have broken into two camps on how to direct bailout cash, but the truth is that there is no right or wrong response to the fiscal crisis.

January 21, 2009

As lawmakers debate a bill to invigorate the ailing economy, conservatives and liberals have split into (predictable) camps over its contents. The former want to tilt the $825-billion package toward more tax relief, particularly for employers. The latter want more government spending, arguing that it's the most efficient way to promote growth. It has become something of a religious debate, with both sides clinging tightly to beliefs that they can't actually prove.

Let's face it, even economists are having trouble finding the right response to the current problems. For the last few decades, Washington has battled recessions mainly by lowering the central bank's interest-rate target. The supply of cheap money stimulated spending and revived the economy, in large part by making it easier for businesses to invest, restructure and rebound. But in the current downturn, credit has remained stubbornly tight even as the Federal Reserve pushed interest rates practically to zero. So Congress has come under intense pressure to act, even though its track record on turning the economy around is mixed at best.

We think a sizable stimulus package is warranted, but lawmakers have to jettison their ideologies and focus on results. There's no right balance of tax cuts and spending programs; instead, there are more and less efficient techniques to increase consumption and production. Congress also has to try to use the money in ways that people can see and feel, to maximize the psychological impact. Consumers' pessimism and insecurity are exacerbating the downturn, potentially turning a dip into a downward spiral.

We like the idea of directing more money to people who can't help but spend it, such as the unemployed, and projects that are ready to be built. We also would welcome accelerated tax breaks for businesses, which would encourage them to buy equipment or expand operations sooner than planned. These breaks for businesses, however, should allow the market to dictate where the money goes, rather than trying to steer dollars to favored industries.

We're also skeptical about the benefits of the tax rebates President Obama has proposed. When Washington has provided rebates in the past, taxpayers have used much of the money to pad savings accounts or reduce debt, neither of which helps the larger economy. To its credit, Obama's team sought to make the aid seem less like a one-time bonus than a pay raise (by reducing the amount of tax withheld from paychecks). That's smart, but it's not likely to boost spending unless those workers feel secure in their jobs. And unfortunately, Washington hasn't given them a good reason yet to feel that way.

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