RAY SUAREZ: The question at the White House and on Capitol Hill: how to craft a stimulus package to boost an ailing economy.
Some of the ideas under consideration: a package totaling nearly $150 billion, including tax rebates for individuals and families, tax breaks on business investment, and extending unemployment benefits and food stamps.
So what works? We get two views. Joseph Stiglitz is a professor of economics at Columbia University and served on the Council of Economic Advisers during the Clinton administration. He won the Nobel Prize in Economics in 2001. He joins us from the annual meeting of the economic and political leaders in Davos, Switzerland.
William Beach is director of the Center for Data Analysis at the Heritage Foundation. He testified before a congressional committee last week on this subject.
Professor Stiglitz, if they asked you to design the package, where would the emphasis go? What would it seek to do?
JOSEPH STIGLITZ, Economist, Columbia University: Well, I would begin by focusing on, what gives the biggest bang for the buck? The problem is that, over the last seven years, our deficits have increased enormously.
Now, when you’re ranking proposals by the bang for the buck, the number-one is strengthening our unemployment insurance system. When people get thrown out of work, they get money, they spend it.
Number two, giving money, tax rebate to low-income Americans. Again, when they get the money, they’ll spend it. And a tax rebate could be done in a very quick way.
Number three, giving money to states and localities that are facing real financial constraints. Tax revenues are going down. Property values are going down. And most states have a balanced budget framework.
So if the revenues go down, they have to cut their expenditures. And this will depress the economy. So dollar for dollar, this will stimulate the economy enormously.
Encouraging business investments
RAY SUAREZ: If we asked you to design a package, would it be similar? How would you do it?
WILLIAM BEACH, Economist, Heritage Foundation: Well, let's back up just a moment, Ray. Those are the leading ideas. There's one that he didn't speak about, and I'm sure that he meant to, and that is what Republicans and Democrats have done time and again when the economy has fallen on these sort of pebbly paths, and that is to incentivize investment.
Tell businesses that if they'll take production, expansion of plant and equipment, buying equipment, out of the future and bring it to the present, and get a tax cut for doing so, that brings production to the present, creates jobs, expands incomes by making workers more productive.
RAY SUAREZ: So give us an example of what kind of spending you're talking about.
WILLIAM BEACH: In 2003, for example, we had a program, what was called bonus depreciation. It really is giving a tax cut to businesses so that they will do things now instead of three years from now or so. And that worked very well to get production up, to get jobs growing again.
Many people listening to this program will remember how slow jobs were. That's been tried time and again, and it usually works pretty well.
And some of the economic research which is now being done to evaluate which of these programs really work says investment incentives are a really tried and true method for changing the direction, the slope of the economy.
RAY SUAREZ: Professor Stiglitz, I'm sorry, you were trying to get in there?
JOSEPH STIGLITZ: Can I just come in? Yes, first, let me say the idea of promoting investment is very important. The problem with our economy is that we've been consuming too much, investing too little. The savings rate in the United States, household savings rate, was down to zero for the last couple of years.
So it is good to focus on investment. The problem is that it is very hard to design an investment incentive with a big bang for the buck.
Back in 1993, when the economy was weak, one of the projects I worked on was trying to design a cost-effective stimulus. We came up with an idea, which was a marginal investment tax credit, temporary, that would provide strong incentives to do just what was mentioned: move investment from the future into the present.
The problem was it wasn't a corporate giveaway. If firms just invested as much as they would have done, they didn't get anything. It's only when they increase their investment that they got a payment.
And the problem with that was the corporations wanted a giveaway. They didn't want a big bang for the buck. And their interest was really motivated by getting the dollars in their hands today, not by incentivizing investment.
So if there could be an agreement on a temporary, incremental, marginal investment tax credit, that I think would be great, but I don't know if you're going to be able to get that.
Deciding where to send tax breaks
RAY SUAREZ: Respond in specifics to some of the points, notably that he saw that businesses went ahead and did what they were going to do anyway, regardless of the money back from the government, and that it was a less efficient tool for getting money circulating in the economy than putting it in people's hands.
WILLIAM BEACH: Right. Well, there's a couple of things that we've learned since 1993. One is: Don't do an investment stimulus plan when you're also increasing taxes, which was the combination which was going on of the act called the Omnibus Budget Reconciliation Act of 1993.
Another thing, I think we have a little bit...
JOSEPH STIGLITZ: This was actually 1994.
WILLIAM BEACH: ... better knowledge about how specifically to target these investment tax credits. We can do so on industries. We can do so on specific kinds of equipment. We can be much more intelligent in how we focus the tax credit. And it can be done on a temporary basis and should be done on a temporary basis.
When we go to rebates and...
JOSEPH STIGLITZ: But it is still the case...
WILLIAM BEACH: ... increasing consumption, we can have a bump up in consumption, which will inevitably happen, which will stimulate the economy in the short run.
But what we've learned about that is that it doesn't necessarily -- and it frequently doesn't -- change the trend of the economy. What you're hoping for in a stimulus plan is not to just increase consumption or GDP temporarily, but to change the trend from sluggish to growing.
And to do that, you need to expand productive capacity, increase the productivity per worker. And that could be done in the short run. It can be done in conjunction with the consumption side, but it should be the dominant part of the package and not the minor part of the package.
RAY SUAREZ: Go ahead, Professor Stiglitz.
JOSEPH STIGLITZ: Well, two points. Where our economy is really starved of investment is in the public sector. If we had spent money in New Orleans for the levees, we would have saved billions of dollars. Increasing, improving our infrastructure increases productivity.
The real problem with the private investment incentives is that the bang for the buck is very low. We may be doing better than we did in the past, but most of the money goes for investment that anyway would have been done. It isn't really going to new investment.
One can design one that is only incremental. And if we do that, then I think I would support that kind of initiative. But one that gives a tax break for firms that would have done the investment anyway is just putting money into corporate coffers...
RAY SUAREZ: But, Professor, if you give money...
JOSEPH STIGLITZ: ... which are already very strong.
Concerns over consumer spending
RAY SUAREZ: If you send money back into the hands of individual Americans, and they buy shoes for the family, a refrigerator, perhaps a television, aren't you really stimulating the Brazilian economy that made the shoes, the Mexican economy that made the home appliance, and the Korean economy that made the television?
JOSEPH STIGLITZ: It's still the case that most Americans spend most of their money on American products. It is true that some of it goes to imported goods, but your haircuts aren't imported from abroad. The service sector represents 60 percent of the American economy, and that's right here at home.
WILLIAM BEACH: Well, that's generally true. But, remember, the stimulus package that Congress is talking about is to give all Americans the same amount of money, or a family $1,600, $800 per person.
JOSEPH STIGLITZ: Yes, that's...
WILLIAM BEACH: And individuals at the lower end...
JOSEPH STIGLITZ: That's wasted money.
RAY SUAREZ: Let him finish, Professor.
WILLIAM BEACH: Individuals at the low end of the scale are, as soon as you said in your introduction, to spend most of the money. But if you look at the consumption behavior of middle- and lower-income Americans, they are buying at Wal-Mart. They are buying at Target.
And they're buying a lot of foreign products, which is just another reason why, even though it sounds good on paper to send money out and have everybody spend it, it's not as targeted, and it's not as efficient.
And, of course, in many cases, people will pay down debt, or they'll pay their credit cards off, or they'll just say, "This is a windfall. I'm not going to get it again," and stick it in the bank, which goes back to investment and gets back to my favorite way of stimulating the economy.
Public infrastructure investment
RAY SUAREZ: Go ahead, Professor.
JOSEPH STIGLITZ: Well, let me just go back to two of the things that I emphasized. One is increasing unemployment benefits. These people will spend the money, because their source of income has been cut off.
Money for state and localities to maintain their spending on teachers, on construction also is spent mostly on goods made in America.
If you target tax rebates for the people at the bottom, that, too, will have a big bang for the buck. Many of our investment goods are imported from abroad, just like many of our consumption goods, so I'm not sure that distinction is persuasive.
RAY SUAREZ: Go ahead.
WILLIAM BEACH: There's one other thing I'd like to say about what Professor Stiglitz has recommended here, and it's something Congress has to think about. And that is a public infrastructure investment and investment in our public goods.
That is, of course, something we all need to do. We need better highways and schools; there's no question about it.
But as a stimulus program, something to be done in a short amount of time, get it out there, get the economy moving again, we know from time and time again that Washington has the worst time in the world getting any money out in a timely fashion.
You look at the Surface Transportation Act of 1982, classic example of a huge public works program to do what Professor Stiglitz is talking about. And by the time the money got out, Ray, the recession was way over. The economy was growing. It's just not the way we ought to go at this time.
Sending money to the states, another good idea, but they just tend to spend it on their shortfalls. And, well, I don't know. It just doesn't work as well as the investments.
RAY SUAREZ: Quick final comment, Professor.
JOSEPH STIGLITZ: The problem is that, if we don't get money to the states and localities, they'll be forced to cut back. They'll be forced to put people onto unemployment because their tax revenues are going down, and that means they have to cut back expenditures.
And the expenditures that are most likely to be cut are the investment expenditures. So it is something that we need just to keep where we are.
RAY SUAREZ: Well, gentlemen, they are supposedly very close on a final version of the package. I want to thank you both for joining us.
WILLIAM BEACH: Thank you.