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Whose Stimulus Makes the Grade?

By Ruth Marcus
Wednesday, January 23, 2008

One of the benefits of an extended presidential campaign is that it presents real-world tests for candidates. Some take the form of pop quizzes assessing contenders' instincts in a crisis. Others are more like take-home exams -- the latest, and perhaps most revealing, being competing plans for an economic stimulus.

In practical terms, this is irrelevant: The moment for stimulus will be long past by Inauguration Day. But as a way of judging how candidates view government's role, how they balance politics and policy, and how sound their thinking is on economic policy, the proposals offer a revealing report card.

My grading starts with President Bush, because he sets the curve.

George W. Bush: B-minus. The president gets extra credit for signaling flexibility on his roughly $145 billion package and for not insisting on extending his tax cuts, which made no sense as stimulus and would have doomed its chance of passing.

A tax rebate -- the White House has floated $800 per individual -- is a good approach. Bush loses points, however, for excluding those without income tax liability, even if they pay hefty payroll taxes. Points off, also, for failing to extend unemployment benefits. In efficiency and fairness, both are exactly backward. As Federal Reserve Chairman Ben Bernanke explained, "If you're somebody who lives paycheck to paycheck, you're more likely to spend that extra dollar."

Bush says tax incentives for business investment must be a significant part of the package. But such breaks didn't have nearly the positive effect anticipated after they were adopted from 2001 to 2003; the Congressional Budget Office found the impact of those provisions to be "relatively modest"; Moody's Economy.com put it at 27 cents for every dollar spent.

Barack Obama: A-minus. I criticized his previous tax plan, but Obama is at the head of the class with an intelligently designed, $120 billion stimulus plan. He would speed a $250 tax credit to most workers, followed by another $250, triggered automatically, if the economy continues on its sour path. Obama would direct a similar rebate to low- and middle-income seniors, who are also apt to spend and could get checks quickly. One demerit: Obama omits any increase in food stamp benefits, which Moody's estimates would have the greatest bang for the buck, $1.73 for every dollar spent.

John Edwards: B-minus. Edwards gets points for handing in his paper early -- in December, he issued a $25 billion stimulus proposal (plus $75 billion more if needed), including important help to states to avoid cutting Medicaid rolls. But like Hillary Clinton (see below), he would spend too much money on programs -- investing in "green collar" jobs, for instance -- with too long a lag time to make them an effective stimulus. Edwards's grade goes down because he also hasn't explained how the $75 billion would be spent.

Hillary Clinton: C-plus. Clinton, too, raised the issue early, then turned in a faulty first draft with a $70 billion stimulus plan that didn't provide much immediate stimulation. It included a $25 billion increase in the program to help low-income Americans with heating costs -- an excessive amount (the current program is under $3 billion) that probably wouldn't kick in until next winter. Even worse was her housing plan, including a five-year freeze on subprime mortgage rates that could produce higher interest rates and reduce liquidity.

Four days later, Clinton said she would immediately implement a $40 billion tax rebate plan she had put in reserve in her first draft. Fine, but overall, the Obama plan devotes a far greater percentage to spending that is more likely to jump-start the economy.

John McCain: D-plus. The senator should have his plan sent back with "Did you read this assignment?" scrawled in red ink. There's a respectable argument that stimulus isn't needed, wouldn't be effective and could be counterproductive. But the normally straight-talking McCain doesn't make it. Instead, he proposes permanent tax cuts -- cutting corporate rates, increasing investment breaks, eliminating the alternative minimum tax -- masquerading as a stimulus plan.

Mitt Romney: D. Romney's plan is way too big ($233 billion) and badly constructed (most of the stimulus goes to business breaks, his individual tax credits don't go to those who need them most, and his huge, long-term tax cuts would harm growth if not paid for). You don't have to be a Harvard Business School grad to understand that encouraging savings is not stimulative.

Mike Huckabee: D-minus. Huckabee understands economic anxiety better than economic principles. The only way his sketchy proposal could stimulate the economy is by scaring Americans into consuming now, before his Fair Tax takes effect.

Rudy Giuliani: Incomplete. His position is too internally contradictory to grade. The former New York mayor told ABC's George Stephanopolous that "permanent reductions have a bigger impact in stimulating an economy," then said of the Bush plan, which has no permanent cuts, "If it stays where it is, it's a good idea."

marcusr@washpost.com

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