To head off fears of a looming recession, Democrats in the House have come to an agreement with Republican legislators and the president over the details of an economic stimulus package.
The partisan debate about this package, which has not yet passed the Senate, centered on where the money should go. Republicans tend to prefer tax rebates and increased private sector investment, arguing that investment will generate long-run growth. Democrats want to put money into the hands of the working class and lower middle class -- the most likely to go out and spend the money. Their logic is that poorer people spend a larger proportion of their income; thus, the best way to get the biggest "bang for the buck" is to give the money to those who will spend it.
Of course, it is hard to miss that the economic arguments made by members of both parties conveniently accord with their political beliefs. Democrats would like to use the stimulus package to extend unemployment benefits and food stamps, part of their focus on improving government benefits for the needy. Republicans, on the other hand, believe that those who pay the most taxes, the wealthy, should receive a larger proportion of the rebate.
In fact, many Republicans hoped to use the stimulus package to achieve their goal of making the Bush tax cuts permanent, something completely separate from any short-run effort to stimulate the economy.
THE PROPOSAL in Congress represents a compromise between the two positions. Under divided government, both parties had to agree for a plan to be successful, and therefore both had to give a little.
So why were the parties able to reach such a quick agreement in a notoriously partisan election year? Simply put, both stood to gain. The public knows that both Congress and the White House need to be on board for a stimulus to work, and so both could be punished if the effort were to fall through and the economy go into recession. Current legislators from both parties could lose their seats.
Will the package work? Well, it won't solve the fundamental problem that started in the housing market and has spread through "securitized" mortgages. But, in combination with the Fed's rate cut, it will inject liquidity into the market and stimulate domestic demand.
PERHAPS MORE importantly, it will signal to investors around the world that the federal government will not let partisan differences keep it from intervening in the economy when necessary. Of course, there have been fears that, because people have been accumulating debt, they will not actually spend their rebates. That may be true for some, but I'm betting that -- because much of the money will go to the lower- and middle-income bracket -- it will be spent.
Others have raised concerns that the rebate may lead to increased purchases of foreign goods, which would not stimulate American production. Still, the weak dollar makes U.S. goods relatively cheaper and encourages Americans to spend their money at home, and, in any case, services -- like eating in restaurants -- can't be easily imported.
One final concern is inflation. The rebate and interest rate cut will increase domestic spending, grow the money supply, and exacerbate the federal budget deficit by another $145 billion. All of these factors could lead to rising inflation and a weakening dollar.
IN THE END , the stimulus package is a necessary but quick fix. In the long-run, we need to regulate the financial markets more closely to prevent the kind of unwise lending and borrowing that contributed to the problem in the first place.
(Dr. Charles Hankla is assistant professor of political science at Georgia State University.)
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