Wednesday, November 12, 2008

Wisconsin needs economic stimulus that assists workers and the economy

Since January, the economy has shed 1.3 million private sector jobs, over half a million in the last two months. More than ten million Americans are now out of work including tens of thousands in Wisconsin.

Not only are workers losing they jobs, they are having a harder time finding new ones. The number of people who are involuntarily working part-time has dramatically increased, by 544,000 in October, bringing the two-month rise to a record 844,000. The U-6 index, the broadest measure of labor market slack, rose to 11.8 percent, tying the rate for January 1994 (when the measure was first established) as the highest on record.

The percentage of long-term unemployed (more than 26 weeks) rose by 1.2 percentage points to 22.3 percent. It had been 17.9 percent just a year ago. And the average duration of unemployment increased by 1.3 weeks to 19.7 weeks. The two-month rise of 2.3 weeks in average duration is the sharpest increase ever.

For those remaining on the job, wages and hours of work have declined. As a result, consumer spending, the economy's engine for almost three decades, has fallen (by a 3.1% annual rate) for the first time since 1974.

The recession is causing a precipitous decline in state and local government revenues. Wisconsin is facing a record $5 billion budget deficit; New York $12.5 billion. California recently cut its spending by $7 billion.

Nationally states and local government will be forced to slash spending by $100 billion because they are required to balance their budgets. The consequent reduction in demand will make what is already a very nasty recession even worse.

Congress needs to enact a stimulus plan immediately. It should be based on three principals:

1) minimizing the human suffering that is caused by widespread unemployment and underemployment;

2) generating the biggest and quickest bang for the buck;

3) increasing investments in strategic areas that strengthen the economy in the long run.

Wisconsin Congressman Paul Ryan's proposal to cut investment taxes misses the boat on all counts. Ryan and his Republican brethren, including President Bush, remain ideologically committed to the notion that the only acceptable federal response is to cut investment taxes. This approach is wrong on three counts.
  • First, cutting capital gains and dividend taxes which are already taxed at lower rates than earned income won't help the 10 million people who have lost their jobs or those who can't find full time work.

  • Second, tax cuts on non-existent profits and dividends won't stimulate the economy because unearned (investment) income has plummeted with the real economy's decline. Ryan's proposal amounts to little more than a brazen attempt to use the crisis to enact tax breaks for very wealthy people.

  • Third, cutting investment taxes is ineffective because in an economy where credit markets remain tight, interests rates high and consumer demand is declining, business tax cuts won't stimulate increased investment. Businesses don't invest in research and development or new plant and equipment unless there is a demand for what they produce. Yet, consumer spending fell last quarter for the first time since the early 1970's. And that didn't include the impact of the credit crunch which hit in October. We need to stimulate demand (public and private) which will jump start the economy and allow investors to respond to the market.
The current economy demands a stimulus package that will provide immediate relief to the unemployed and provide maximum economic bang for the buck.

Most of the money from the original tax rebate stimulus was saved rather than spent thus blunting its stimulative benefit. By comparison, other options—such as infrastructure spending on deteriorating roads, bridges, mass transit and sewer systems, aid to states, increased food stamps, and unemployment insurance (UI) benefits—are much more cost-effective because they are more likely to channel money directly into the economy.

Mark Zandi from Moody’s estimates that each dollar of refundable tax rebates only boosts GDP by about $1.26, while each dollar of infrastructure spending could provide a $1.59 boost.

Not only are many of these stimulus options more effective than tax rebates, but they also have the added benefit of assisting those hardest hit by the downturn, ensuring necessary public services are provided and tackling long-standing infrastructure needs that would lower transportation costs, decrease traffic, and increase future business productivity.

Zandi’s analysis also shows what doesn’t work as stimulus: a variety of tax breaks for corporations and wealthy individuals which cost over twice as much as they return to the economy. Yet, these are the very breaks that Congressman Ryan and President Bush support.

The Congress needs to shift its focus from Wall Street to Main Street and craft a stimulus package that grows the economy from the bottom up, provides emergency aid to states and local government and invests in the nation's infrastructure. Such an approach will not only create jobs and help those who need it the most, but prevent state and local spending cuts that would make the recession worse and have the added benefit of rebuilding the nation's deteriorating infrastructure creating the basis for long term economic growth and a shared prosperity.

The time to act is now!


Jeff Werstein said...

That chart is amazing. Food stamps, one of the most stigmatized programs there is, actually does the most to boost the economy. I wonder how money from welfare and disability programs stack up.

Anonymous said...

It is no surprise that tax cuts to the wealthy do little good to stimulate the economy. How much do we expect the wealthy to consume beyond their current high levels of consumption? In some scenarios, tax increases on the wealthy could actually stimulate the economy. For example, if the wealthy have idle cash and it they pay the increased tax from this idle cash and if it is then circulated into the economy through food stamps or by building infrastructure, aggregate demand rises. (The velocity of money has increased as idle money begins to circulate). Comment by Jim Carpenter. (297-6451)