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Nothing Stimulating About This Deal

The opinions expressed by columnists are their own and do not necessarily represent the views of

I wouldn’t want Hank Paulson negotiating on my behalf.

The U.S. treasury secretary did such a poor job representing the White House in negotiations on the economic stimulus deal, it wasn’t clear if Paulson was purposely trying to help House Speaker Nancy Pelosi or simply unaccustomed to how business is done in Washington. If it weren’t for House Minority Leader John Boehner, this deal would be far worse -- and that’s not saying much, given some of the misplaced priorities that made their way into the package.


The episode represented an abysmal failure by the White House to stand firm on conservative principles. After spending much of the last year winning battles with Democrats on everything from Iraq funding to the federal budget, there was no reason to give in to so many demands so quickly. Bipartisanship is honorable, but not when it benefits just one party.

In this case, the problem stemmed from Paulson’s willingness to accept many liberal priorities even before anyone sat down at the table to talk. For instance, the White House floated the idea of giving handouts of $800 for individuals and $1,600 for married couples -- figures significantly higher than what Democrats had proposed.

Sen. Barack Obama, competing against Sen. Hillary Clinton and John Edwards for the most aggressive stimulus package, proposed handouts of only $250. And congressional Democrats put forward a figure of $500.

Given where the White House started in negotiations, it’s not surprising the final figure ended up at $600 for tax-paying individuals and $1,200 for couples. But the real kicker was a concession to Pelosi that will send $300 to Americans who paid no income taxes last year. With Paulson setting the number so high at the start, there was little room to actually negotiate.


Contrast this episode with the fight over the dozen appropriations bills in 2007. Democrats wanted to spend $20 billion more than Bush proposed, but the president held firm on his number. After much rancor, liberal lawmakers finally settled on Bush’s number just weeks before Christmas. The White House walked away with a win when almost everyone in Washington thought it wasn’t possible.

No such luck with the stimulus. Let’s begin with the tax rebates, which amount to government giveaways that will probably have little impact on the economy in the short term. “Tax rebates and similar cash transfers don’t stimulate the economy,” said Rea Hederman of The Heritage Foundation. “The federal government cannot just wish new purchasing power into existence.”

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.

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