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<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, February 17, 2008 Tax code tweaks would provide a better stimulus By James McCusker Those who do not care about economics, rejoice. You will get a tax rebate anyway. The federal government is sending money to economics enthusiasts and unbelievers alike. In fact, the checks are in the mail -- almost. For those who care about economics, though, besides the cash there is even more reason to rejoice. Fiscal policy has staged a comeback and we have a rare opportunity to see it work -- or not. The Economic Stimulus Act of 2008 was passed by both houses of Congress and delivered to President Bush, who has signed it. Analysts from the Congressional Budget Office estimate that about $69 billion in tax rebates will be mailed out to individuals and households -- a process that will take about ten weeks, starting in mid-May. An additional $45 billion in temporary tax deductions for businesses are also part of the new law. Will this program have the desired effect of jump-starting the economy? Maybe. Economic policy is by nature experimental; we are never absolutely certain what will happen because there are too many unpredictable factors. Unlike the rodent-based sciences, where lab rats seem to spend their time wearing excessive makeup, dining on junk food and drinking mass quantities of one beverage or another, economics has no access to what are called "controlled experiments." Occasionally, professors design economics experiments where graduate students substitute for the lab rats, but while this tends to lower the cost of the operation, the results are generally unconvincing. Our real economic lives are simply too complicated to fit into a laboratory experiment. The policies embedded in the Economic Stimulus Act, though, provide us with a look at some of the most important, and interesting aspects of economics -- the stuff of Nobel prizes and some of the sharpest thinking on the subject that we are likely to encounter. The underlying idea of using government spending to stimulate a sluggish economy is, at heart, a Keynesian one. John Maynard Keynes was a British economist who believed that central governments should use their spending -- even if it meant running deficits -- to increase aggregate demand and get the economy rolling again. Keynes' thinking was undoubtedly influenced by the Great Depression, a time when confidence collapsed, unemployment soared to more than 20 percent and economies showed no signs of turning themselves around. But simply firing up a burst of increased government spending isn't enough. It turns out to be more complicated than that. Right now, for example, there are more than 303 million people in the United States; no two are alike. And although we can establish patterns of behavior, especially economic behavior, individual differences, perceptions and unpredictable events combine to make every economic policy an experiment. There are some things we have learned, though. The economic stimulus package of 2001, for example, included both one-time cash payments to individuals and some permanent tax changes. Measuring the effectiveness of that policy, though, was not an easy task, for shortly after the checks started to go out, the Sept. 11 attacks on the World Trade Center and the Pentagon changed everyone's perceptions and outlook. The permanent tax changes -- such as eliminating the "marriage penalty" -- did eventually have a positive effect. The difference between a permanent and a temporary change in income is the reason why Ken Mayland, president of ClearView Economics, is skeptical about the effectiveness of the Economic Stimulus Act. "Temporary changes will, at best, have only temporary and muted effects," he says. There is no doubt that the federal checks arriving in the mail will increase overall spending temporarily, but it is not clear how much. The Congressional Budget Office estimates, for example, that individuals will spend only 53.4 percent of the money received this year. That is certainly a temporary, muted effect. Mayland says that "permanent changes in taxes lead to permanent changes in behavior." He is quick to add that this not his original idea; Milton Friedman won a Nobel Prize in 1976 for, among other things, his "Permanent Income Hypothesis," which states a similar view. The truth is that individuals do not react to one-time changes in the same way as they do if they believe the change is permanent. Gasoline prices are a good example of this. Economic policy makers are trying to balance the good of giving our bluesy economy a boost against the bad of increasing the deficit at the time when we can ill afford to do so. Still, if we want to shift the economy into a higher gear, it is clear that they should be looking to permanent changes in the tax code rather than quick fixes. Economics certainly tells us that. If only we had lab rats to back it up then maybe Congress would believe it. James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.

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