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The best stimulus package is no stimulus package


CHICAGO - Democrats know how to do fiscal stimulus and Republicans know how to do fiscal stimulus, and both parties are eager to do it right now, their way.

But they sound like the character in Shakespeare's Henry IV who brags that he "can call spirits from the vasty deep."

Replies a skeptic, "Why, so can I, or so can any man; but will they come when you do call for them?"

Our leaders can embark on all the fiscal stimulus they want, but that doesn't mean the economy will be stimulated.

There are plenty of politicians who think the sun rises everyday just to gaze on their glory. So it's not surprising to find that most people in Washington assume the nation's productive sector will respond quickly and faithfully to their guidance.

But the American economy is a big, complicated apparatus with many impenetrable mysteries. And for better or worse, trying to fine-tune it with fiscal policy is like trying to paint watercolors with a push broom: The instrument at hand is too clumsy to be of much value.

This is true of President Bush's tax package, which has some merit as tax policy but none as fiscal stimulus. It's true as well of the plans being offered by Democrats, which are different from his approach in having all the flaws but none of the virtues.

Two Democratic ideas are getting the most attention. The first is South Dakota Sen. Tom Daschle's proposal to grant up to $1,200 in rebates to every household that pays federal income or Social Security taxes. The second is from Sens. Jon Corzine of New Jersey and Mary Landrieu of Louisiana, who want to create the equivalent of a one-year payroll tax holiday by refunding last year's payments, up to $765 per worker.

Both assume that the way to get the economy humming again is to give money to people who will spend it. Mr. Daschle says his plan would shower $71 billion on taxpayers, while Mr. Corzine and Ms. Landrieu say theirs would be good for $170 billion.

In contrast to the Bush plan, their tax cuts would be here today and gone tomorrow, which reduces the long-run cost to the Treasury.

Further, supporters say that most of their benefits would go to lower-income people who would spend the windfall - unlike the rich, who have the miserly habit of saving any unexpected income.

But the fleeting nature of the "stimulus" would deter most recipients from doing what they're supposed to do. People are more likely to respond to lasting changes in their income than to transitory ones, particularly during times of uncertainty. So Americans probably wouldn't go out and enrich the merchants at the mall.

If you want proof, just look at Mr. Bush's 2001 tax rebate, which provided up to $600 per family. The administration says this bold measure helped lift the economy out of recession by spurring consumer spending. But University of Michigan economists Matthew Shapiro and Joel Slemrod found otherwise. Recipients who were surveyed said they mostly saved the money or used it to pay existing bills, thus defeating the whole purpose.

The savings rate rose during the rebate period, while personal consumption expenditures did not. "The spending rate was quite low compared to what many economists had expected," they concluded in a study for the National Bureau of Economic Research. What's more, they noted, low-income people were no more likely to spend the rebate than high-income people.

Even if either Democratic plan would work as designed, it would need a lot of luck to work at a moment when it could do some good. By the time any bill can get through Congress, be put into place and start depositing dollars in American wallets, months will have passed. By that time, the economy's troubles probably will have melted away like the snows of January. So the attempts at pump-priming stand to be pointless.

Which is not to say they would be harmless.

They would add tens of billions of dollars to a budget deficit that is already projected to exceed $300 billion this year and $1.5 trillion over the next decade - not counting the cost of a war in Iraq or a Medicare prescription drug benefit. All the money would be siphoned away from private investment, which wouldn't be a boon to prosperity.

Left to its own devices, the economy will revive in due time, and probably sooner rather than later.

While we wait for that to happen, Congress and the president can do something to help: Stay out of the way.

Steve Chapman is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. His column appears Tuesdays in The Sun.

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