Over the past several days, Senator Susan Collins (R, ME) has emerged as a leader of the moderate Republicans working with several Democratic Senators also concerned about the high cost of the economic recovery bill. Unfortunately the compromise they have crafted, which seems to be mainly about cutting government expenditures to make room for expensive tax breaks, cuts deeply at the precise areas in which women typically work, Head Start, education, and health care. Half of the proposed additions to Head Start funding ($1 billion of a total of $2 billion in the House) and approximately half of the proposed aid to the states, which would largely be spent on education (a cut of $40 billion of $79 billion in the House version), are eliminated in the Senate proposal. Another huge proposed cut is the assistance that would be given to unemployed workers to enable them to exercise their COBRA benefits and purchase their employer-based health insurance policies (a cut of $19 billion of a House total of $41 billion). Also $6 billion in health prevention activities would be cut. $11 billion of proposed child tax credits for working families are also proposed for cuts, in favor of an expensive ($70 billion) 1 year fix to the alternative minimum tax (extending a patch which Congress has usually taken up annually). The latter tax was originally designed to collect a minimum amount of taxes from very high earners whose specialized deductions might otherwise allow them to escape taxes; because it is not indexed for inflation, it is beginning to affect earners who are not especially wealthy, but are still at the higher end. In the “moderate” Senate proposal, funds are apparently being taken from women’s jobs in health care, education, and child care and from tax cuts that would go to low and middle income women and their families in order to give more disposal income to high earners.
A fundamental flaw in the moderates’ proposed Senate package is a misunderstanding of what a fiscal stimulus is all about. Right now in the United States, no sector of the economy is strong. What we need is more aggregate demand, more entities buying products and services so businesses can make money and hire more workers. Instead, the financial crisis has set off a downward spiral. Consumers have reduced spending because they have lost jobs and/or equity in their homes and/or because they are worried about losing their jobs and/or because they are simply worried about the future, and want to have some savings for whatever comes next. No one knows for sure how long the economy will remain in recession. Like domestic consumers, the export sector could also provide demand for US products, but the rest of the world is faring no better than the United States. Another component of aggregate demand is business investment; even though the cost of borrowing funds for investing is very low now, businesses are not investing, because under current conditions there is too much uncertainty and they do not see clear opportunities for profit. This leaves government. $1 of government spending generates at least $1 of aggregate demand. Some types of government spending generate even more aggregate demand. For example, every $1 spent on food stamps generates $1.73 in aggregate demand as those who sell the food take their earnings and spend them in turn. This additional spending is often called the multiplier effect. Infrastructure projects also have a high multiplier, about 1.6. Aid to states is estimated to have a multiplier of about 1.4. With all other sectors of the economy weak, the only way to increase aggregate demand and to enable businesses to sell goods and services, make profits, and hire workers is to increase government spending.
Fortunately, the US government is able to borrow in order to spend these funds, since most people around the world have faith that the US government will repay its debts. The safest investment world wide is now considered to be US government securities, promises to pay from the US government to those who hold the securities. And, to be sure, while we should all consider our ability as a nation and as taxpayers to pay off this debt in future years, the alternative is much worse. If we do not enact a large enough stimulus, we risk allowing the economy to wallow in recession. We will inevitably run up a huge deficit from the failing economy because our government will still have to provide essential services like defense, Social Security, Medicare and Medicaid, aid to the poor, and so on, while revenues from the failing economy will shrink precipitously. The stimulus bill is an investment in increasing the nation’s income and hence increasing the income tax revenues that will allow us to repay the government debt that we are incurring. It is a sound investment. Thus, the effort on the part of moderate Republicans and “blue dog” Democrats (conservative Democrats) to limit the size of the economic recovery bill is horribly misguided. Right now, many, many economists are recommending a fiscal stimulus of at least $1 trillion.
It is true that some types of government spending, those with higher multipliers, are more effective as a stimulus than others, those with lower multipliers. The so-called moderates in the Senate seem not to have a very clear idea of which types of projects have higher multipliers than others. They are apparently concerned about refurbishing trails and parklands, yet those expenditures likely have a fairly high multiplier since so much of the expense of those projects is wages: workers will spend their earnings and those who supply them (with food, clothing, etc.) will then be able to spend their earnings and so on. The moderate Senators have also eliminated some energy-related provisions because they don’t think those are very “stimulative”–about $5 billion for retrofitting schools and public housing to increase energy efficiency, as well as $16 billion for new school construction, all programs likely to have high multipliers. They clearly have not chosen to continue or expand those programs with the highest multipliers and eliminate those with the lowest. If they were doing that, they would not be decreasing programs like these and increasing tax cuts.
In contrast to government spending, many tax cuts do not result in 100% of the lost revenue to government actually being spent, because people typically do not spend all their incomes–they also save. Tax cuts to low and moderate income people are likely to be mostly spent, say in the 90-95% range—a payroll tax holiday, which delivers the tax cut in small sums in every paycheck (rather than in larger annual lump sums) is scored at $1.29 generated in aggregate demand for every $1.00 of tax reduction. Tax cuts to higher income individuals will generate less spending (extending the alternative minimum tax is scored at $.48), and tax cuts to businesses generate the least spending of all (down around 20-40% spent). The Obama administration included tax cuts to the tune of about 39% of its original proposal, because even though some tax cuts are not 100% spent, they do put money in people’s pockets quickly, whereas some government spending programs take time to get up and running (other government spending, of course, like food stamp expansion and extended unemployment insurance benefits, are very fast-acting). But the Obama tax cuts (especially after the House eliminated the low-multiplier business tax credits) are targeted at low and moderate income families who are most likely to spend the extra money they find in their pockets, while the Republican-led tax cuts are not.
It’s extremely unfortunate that so-called moderates in the Senate are cutting important spending from the economic recovery package to provide tax cuts to high income people — those tax cuts will not generate nearly as much aggregate demand as the spending programs being eliminated—they weaken the bill’s stimulative effect. Moreover, it is ironic that Senator Susan Collins has chosen to cut spending programs that are especially important to women, both as consumers of the services for their families (health and education and child care) and as workers in the affected industries. Women are about 42% of the unemployed now and about 47% of employed workers. They surely should have a proportionate share of the jobs that will be created by the stimulus package. Unfortunately, the moderate Senators’ proposal takes us further away from fairness to women.
Dr. Heidi Hartmann, President, IWPR