View From a Height
Commentary from the Mile High City
Tuesday, January 07, 2003
The biggest problem with the Democrats' "Stimulus Package" is the very thing they're trying to use as a selling point: its temporariness. Essentially, it ends up amounting to a one-time check from the Federal to taxpayers. There's a peculiar rule that requires 60 votes to make tax cuts that extend beyond 10 years permanent. This is why the tax cuts of 2001 are slated to end in 2011. It's also why they will be far less effective than permanent tax cuts over the same period of time, even if those tax cuts were eventually repealed, especially towards the end of that time span.

The reason goes to the nature of economic decision-making. Business knows that these tax cuts are going away in 9 years. So they realize that consumers won't have as much on hand to spend in 2012. They won't make decisions that rely on that consumer spending. They'll tend to hoard cash now, knowing that it might not be there later. So while spending may increase somewhat, it'll always be with one eye on the clock, and the economy won't get the full benefit of the cash infusion. The same goes for consumers, only more directly, and more sharply, since consumers don't tend to plan as far ahead as business. Come 2010, all the Financial Talking Heads at CNBC will be advising consumers to beware next year's tax increase, and maybe sock away a little under the mattress Just In Case. Having the extra cash on hand may tend to soften a little the inevtiable recession that 2012's tax increase will bring. But it also means we'll be facing it without the growth that could have been, could have produced more tax revenue without raising rates, making the increase unnecessary in the first place.

The Democrats' proposal just makes this mistake all over again. We'll give consumers a little more cash now to build up their MasterCard balances, but we won't make any structural changes to the system. And the economy responds most fully to those structural changes.

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