Friday, February 13, 2009

Defanged Stimulus Intentionally Watered down to Lessen Impact of Recovery for Republican Mid- Term Elections

The Financial Times honestly evaluated the final stimulus bill and came to these conclusions; the AMT fix for higher incomes watered down the aid to states limiting recovery and short term benefits, and will be nearly invisible to Americans for the first two years. That will benefit Republicans who will claim the stimulus didn’t work and any improvement was part of the normal business cycle. Here are the details:

Stimulus bill marked by political gesturing

The stimulus bill … is expected to be voted on on Friday, has been altered in shape and size during three weeks of being kicked around Capitol Hill. What has emerged, some economists say, bears the marks of political gesturing as much as boosting the economy.

Not only were Senate moderates in effect allowed to dictate a ceiling for the programm of $800 billion, but nearly 10 per cent of the package was given over to the latest of a series of temporary fixes to the perennial alternative minimum tax problem. The AMT, a tax originally aimed at the super-rich, has gradually come to threaten upper-middle-income households. “The AMT fix had nothing to do with stimulus,” says Dean Baker of the left- leaning Center for Economic and Policy

To pay for items such as the AMT, the Democrats had to accept cuts to their priorities, including aid to bail out cash-strapped states and tax reductions for lower-income families, both of which were likely to stimulate the economy more quickly … this appeared to be a deliberate political manoeuvre by the Republicans. The cuts in aid to states … will not only affect the US’s infrastructure through constraining spending on school construction but also reduce the short-term stimulus in the bill.

Macroeconomic Advisers, an economic consultancy, says that such aid can affect the spending decisions of state and local governments even before they receive the money. “For example, they may opt to forgo laying off workers, cutting purchases, or raising taxes, even before the funds may be in their hands,” the firm says. What remains … is still reckoned by most economists to promise a material effect on the
economy. The bipartisan Congressional Budget Office predicted that an average of
the House and Senate bills would reduce the unemployment rate to between 6.8 8.1 per cent next year, against 8.7 per cent without the stimulus, and increase
gross domestic product by 1.1-3.3 per cent next year. But if the package fails to revive the US economy, Democrats as well as Republicans will have an excuse: that what finally emerged, thanks to political manoeuvring on Capitol Hill, is
smaller and focused on different things than the bill Mr Obama envisaged

'Impact of US plan will be felt slowly

Few economists think its impact will be felt any time soon by average voters. The real impact may be invisible to the naked eye. “You won’t open your door or unseal your latest pay cheque and find that everything’s going to be different,” says Mark Zandi, chief economist of “But if people feel the stimulus is going to have a broader effect on the larger economy, it may boost their confidence as consumers.”

Perhaps the most tangible impact will be on people’s withholding taxes … a minor increase in their take-home pay – $32 per two-weekly pay check for a middle class household and $16 for an individual. It will appear small. But that is deliberate. “If you give people the tax cuts in one lump sum, people are far likelier to save it – which is not what you want,” says Tom Gallagher, a Washington analyst.

The impact on jobs will be less easy to measure. Barack Obama has said the bill will create or save 3m jobs over the next three years. He might meet a larger part of that pledge from jobs that are saved. For example, most state governments have been preparing to lay off employees since they are obliged to balance their budgets. “In general, I don’t think people will ‘feel’ the effect of the state/local government subsidies,” says Chris Edwards, an economist at the libertarian Cato Institute. “It will just mean that state/local governments won’t have to restrain themselves as they would otherwise have had to.”

Exceptions could be found in the construction industry, which has suffered the biggest layoffs in the past 14 months and could see a rapid uptick from the infrastructure spending in the bill. Laid off construction workers in the capital are likely to be particularly lucky; Mr Obama plans to spend $6.5bn making federal buildings energy efficient. As for infrastructure, most of the short-term spending will be on repairs of roads and bridges. Here most Americans will see a tangible result – longer traffic jams.

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