What’s so sad is that Bush should know from experience that rebates don’t work. A study of Bush’s 2001 tax rebates by the National Bureau of Economic Research revealed that just 22 percent of households receiving a rebate actually used it to purchase something. The rest decided to save it or use it to pay off debt. “The low spending rate implies that the tax rebate provided a very limited stimulus to aggregate demand,” concluded authors Matthew Shapiro and Joel Slemrod.
Another troubling component of the stimulus deal is the increased role government will now play in the mortgage market. Under the plan, Fannie Mae and Freddie Mac would have the authority to buy mortgages valued at up to $725,000, a figure well above the median home price in America.
Even some of the positive developments of the deal -- such as the tax cuts for businesses -- are tempered by the fact they are only temporary. Businesses will get a boost in the short term with the ability to deduct new investments from their tax liability. Negotiations should have gone a step further, however, by reducing taxes on capital gains and dividends. When Congress did that in 2003, it gave the economy a big boost.
The best part of the deal is what’s not included -- at least not yet. Conservatives should be thankful Boehner held firm and convinced Pelosi to drop her demands for new government spending. There was no wasteful pork in the stimulus package, and negotiators wisely rejected additional spending on infrastructure and renewable energy.
Pelosi angered many in her own party when she stripped an extension of unemployment benefits and food stamps. Democrats in the Senate have vowed to include both in their version of the stimulus. Doing so would be a mistake. Heritage’s James Sherk and Patrick Tyrrell explain: “Extended unemployment insurance lengthens unemployment. It encourages workers to stay unemployed and companies to delay rehiring laid-off workers. Higher unemployment and fewer workers do not promote economic growth.”
There’s much work left to be done and even more uncertainty over how the deal might change once the Senate takes its turn. It’s unfortunate that conservatives once again find themselves on the defensive and in a badly compromised position, thanks to inept negotiating by the administration.