Pearlstein: Energizing the Economy

Washington Post business columnist Steven Pearlstein was online Wednesday, Jan. 9, at 11 a.m. ET to discuss what economic stimulus package makes the most economic and political sense.

Read today's column: Stimulate the Economy, Don't Play Politics With It

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

His column archive is online here.

The transcript follows.

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Annandale, Va.: You do a disservice to your readers when you unfairly blame the Democrats for the impasse in good governance. The Democrats stood on the steps of the Capital singing God Bless America with the Republicans after 9/11 and all they got in return was Rovian slime. Right now nothing is getting done as the Republicans threaten to filibuster anything that could be construed as a win for the Democrats.

While I wish that Nancy Pelosi and Harry Reid were more proactive in taking on the battles that need to be fought, I don't think you should take them to task when their hands are tied by Republican tactics.

Steven Pearlstein: You know I generally don't say this but I'm going to say it now: You're wrong.

You're wrong in terms of short-term tactics because if you want Nancy Pelosi and her side to succeed, the most effective thing she can do to win support is to act like a grownup and be seen to be acting in the public interest, not in the interest of her party, and she will garner more support and votes. That's what the polls say. That's what the recent election returns say.

If she had, instead of issuing her press release, simply stepped out of her office and said in front of a few cameras, "You know, that speech by the president wasn't helpful. He knows he's not going to get the tax extension from this Congress. That's not constructive. This is an urgent national problem, we have divided government, and we need to find a few things we can all agree on and do them rather than engage in this partisan kabuki dance. I'm here, I'm ready to meet any time. We should be able to do this quickly. That's all I have to say."

Believe me, Bush would have come out the big loser in that exchange.

But more importantly, you're wrong because your comment presumes that if you answer them tit for tat, you'll push them back and if you don't, you'll lose. In fact, what happens is that you poison the well with these kind of exchanges, which makes actually doing something much more difficult, and the American people suffer. And when they suffer, they take it out on whoever is in office, which at this moment would mean the Democratic leadership in Congress.

John McCain doesn't agree with Nancy Pelosi on a lot of issues. But John McCain is much more popular than Nancy Pelosi. And its not because of his positions. Think about that. And the reason John McCain is more popular is that he is perceived as a straight shooter who pays no attention to partisanship and is critical of his own as he is of the other side. He's a grownup. The leaders of his own party dislike him, and just as Democratic leaders dislike Pelosi dislike the handful of Democrats who are similarly independent minded and refuse to play the partisan game. And they all just ought to cut it out, because its doing nobody any good except the special interests to whom they have become beholden.

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No $300 Check, Please: Remember when every tax payer received a $300 refund? Oh wait, it was so minor that you probably don't. My husband and I were just dating then and we still make fun of that ridiculous handout. Anyone that thinks $300 is even a decent chunk of change is clearly struggling so much that they'd be impressed by any gimmick.

Steven Pearlstein: Look, that's the way it looks from your vantage point. But that's not the point. If everyone who gets a $300 check spends it over the course of a few month, it increases aggregate demand in the economy, which translates into sales, jobs, rents, tax payments, etc. etc. And that heps to stabilize the entire economy. Its not so much about changes in your standard of living in a direct sense. Its about reducing the chance, at the margin, that you or your spouse will get laid off, which, in fact, would be a MAJOR event that you wouldn't forget very soon.

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Washington: Is the FAIR tax or a variation on the theme viable? Isn't that the only way to extend our taxes to imports without starting a trade war?

Steven Pearlstein: The fair tax is a whacko idea, really. I like iconoclastic ideas, but this is simply a bad one. You're talking about a national sales tax of more than 30 percent when all is said and done. That's very distortive, its regressive and it will simply create a huge underground economy. It would be nice if life could be that simple, but in this case it just can't. Sorry.

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Madison, Wis.: Your column today was excellent. Do you have any sense that Congressional Republicans (the only ones who can defeat the President's inevitable veto) would be willing to pass such a stimulus package as you have described it? Or, are they settled on defeating any measure that would make Democrats look like they're accomplishing something? I hate to sound snarky, but I'm concerned that Congress is not just clueless but reflexively cynical.

Steven Pearlstein: Yes, the Republicans are perfectly capable these days of stopping something that is good for the country if they think it will make Democrats look good. The Republican leader of the senate, Mitch McConnell, takes this as a key purpose in life. The House Republicans would have the same attitude except they can't block things very readily. But this is an election year, and they all know if they have a No vote against a stimulus package, it would make a dandy television ad by their opponent. So they'll think twice about voting no to a reasonable package, or sustaining a veto of a reasonable package. That's why the Democrats need to make this a centrist package, and stop trying to use it to right all the ills of the economy. The idea is to cushion the recession. Focus on that and they'll be fine.

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Branford, Conn.: Will there be consideration for those who have stayed out of debt and saved but now are dependent on the interest income from those savings? That segment has been hurt badly in the past by the lowering of interest rates to stimulate the economy.

Steven Pearlstein: No, I think you're missing the point. The idea is to stimulate demand by getting money into the hands of the people who will spend it or those most affected by the downturn, like the unemployed. If you start to think about this program in who "deserves" this or that, you'll get right back into the partisan soup.

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Falls Church, Va.: Did you happen to see the item in today's paper about Baltimore suing Wells Fargo for excessive lending to minorities? When a bank concludes that it is likely to be sued both for too little lending to minorities and for too much, isn't the rational response simply to pull out of that market?

washingtonpost.com: Baltimore Sues Subprime Lender Over Race

Steven Pearlstein: That's an interesting one. But I think you've framed it incorrectly. Banks can get sued for discriminating against people on the basis of race in their lending. They can also get in trouble for abusive lending. That's the way it should be. Its not a question of punishing a business for both too much and too little. Abusive lending is not too much lending. Abusive lending is abusive.

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Washington, D.C.: I just moved to DC and am reading the Post and your column for the first time. Enjoyable reading. Those are great ideas that you put forward. I would be interested to have your answer to the question you ask in the final paragraph.

Steven Pearlstein: My answer is that there is no good reason other than pigheadedness and failure on the part of politicians to perceive their OWN best interest, let alone ours. They live in this hothouse up there where they think everyone on the outside views things through the same partisan lens they do, and they think they gain little tactical advantages from the games they play. In reality, nobody gains any advantage and they all are held in high disregard by the American public.

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Seattle, Wash.: I'm going to be slightly cynical here and say that this is the fifth rationale for tax-cuts we've seen by Bush. Is there any occasion he doesn't believe tax cuts for the top 1 percent aren't required?

Steven Pearlstein: No, he believe a tax cut or tax incentive is the solution to every problem, including lumbago. But that doesn't mean that occasionally he's not right. A quick, one time tax rebate to households that would spend it is the way to go here. And the households that would spend it are lower income. The Democrats want to make this a progressive-regressive issue, to argue that it is low income people that "need the help." They'd need the help even if there weren't a recession. But the point here is to stimulate aggregate demand, not right the wrongs of the marketplace. And it is important to keep our eye on that ball if we want to get a stimulus program approved in a timely fashion. If they approve something in July, it probably won't do much good.

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Plano, Tex.: Where does the money come from for these "injections" of billions of dollars into the system from the Fed?

Steven Pearlstein: They print it!

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Oakton, Va.: How does a shared-equity mortgage work if the value of the home decreases?

Steven Pearlstein: The holder of the equity coupon gets nothing. That's his risk, which is why he gets a higher return than a mere lender when the price does appreciate. Higher risk, higher reward. That's how markets work.

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Richmond, Va.: Bush, and even some Republican candidates, are talking about making his tax cut permanent as the way to stimulate the economy. Does that make ANY sense, considering the tax cuts are in place, and credible people are talking about recession.

Steven Pearlstein: No, it is nonsensical in an economic sense. It's a different issue. Extending permanent tax cuts is a question of fiscal prudence (will it sustain or increase harmful deficits) and whether, if a tax cut is paid for with a spending cut, taxpayers as a whole would value the money more than the government services. That's a political question, not an economic one. But as a practical matter, the economy could achieve the same growth rates with the higher or the lower rates. There is no direct connection between tax rates and long-term economic growth at the levels we're talking about. That's a Republican lie.

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Hey, I'm not to proud to take 300 bucks: I really appreciate the premise of this column. Last month, I dipped into retirement savings to pay my property taxes. (Incidentally, I've owned my house for fifteen years.) I'd be so grateful for some relief on my payroll taxes, which I pay on part-time and 1099 income --taxed at higher rates than Warren Buffett's income, believe me. And I'd spend it, I promise. I've got bills to pay! I can't tell you how little I care about whether some CEO gets a tax break or whether some Congressman scores a political point. I've moved from disdain to actual revulsion toward them. They just don't care, do they? It's all about them all the time. Disgusting.

Steven Pearlstein: Thanks.

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Baltimore, Md.: Re partisan gridlock on a stimulus package: All your suggestions make sense. The problem is, the Republicans took back the House in 1994 following decades in the wilderness by engaging in highly charged, partisan attacks on the President. (Attacks fueled by Bill Clinton's stumbles in his first year and a half in office.)

A formula for winning elections (which, frankly, is what politics is all about, it's not about governing) is bound to be endlessly replicated until it is shown to fail. That's why you have people like John Boehner and Nancy Pelosi now fronting for their parties in the House instead of the likes of Bob Michel and Tip O'Neill.

Steven Pearlstein: That's right. But after the year she just had, I'd think Ms. Pelosi would see that she can succeed more by taking a different tack. The problem is that has more to do with the Senate than the House. But she can't continue to think of it as the Senate's problem. Its her problem too. And she has to start tailoring the House output to the realities of the Senate. That's just the way it is.

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Oakland, Pa.: I am no fan of the President, and scoffed at the $600 rebate my wife and I received (pure politics, should be used for deficit reduction, etc). Of course, we went out and bought a new refrigerator with the check. So we played right into his hands, didn't we? (Seriously, thanks for providing a broader view of the concept).

Steven Pearlstein: Not sure I'd put it as playing into his hands, but you did your part for the economic recovery.

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Laurel: Wouldn't $300 primarily stimulate demand for imported consumer goods? How much does it help the economy for us to buy more Saudi oil, Korean electronics or Indonesian clothing?

Steven Pearlstein: There is more "leakage" now than there used to be, and that is a problem, because at the margin, what we tend to spend on is a bit more clothing (imported), electronics (imported) and energy (imported).

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Arlington, Va.: Isn't one of our biggest problems as a nation that we spend too much and save too little? I don't get why you think it's a good idea to give away money for people to spend. Isn't our whole economy a giant house of cards? Maybe it needs to fall down so we can start building it the right way.

Steven Pearlstein: It is a big problem, and a long term problem. In the short term, however, if everyone starts saving, it will really deepen the recession and create a downward spiral that won't be in anyone's interest. We need to learn to save when times are good.

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Troy, N.Y.: Why not just let the free market fix itself? Robert Samuelson has written about the upside of a recession in this paper.

Steven Pearlstein: This is a necessary recession. I agree with Sam. The idea isn't to prevent it -- its too late for that now, anyway. The idea is to provide a bit of cushion and make sure it doesn't get into one of the dangerous downward spirals that takes things too far. Then you get into a situation like Japan. We need an orderly transition to new levels of spending, to a new value for the dollar, etc.

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McLean, Va.: Have you gotten any feedback from lawmakers or lobbyists about your proposal for giving lenders a share of the eventual capital gains at sale time in return for foregoing mortgage rate resets and foreclosure? Are any of the "movers and shakers" taking your proposal seriously? or are we choir members singing in the wilderness?

Steven Pearlstein: I've run the idea by people at Fannie and Freddie who say it could work. But they're not championing it by any means. And as to others, so far no takers. I've written this in several columns now, but I think people are afraid of trying something new in the current situation. Too bad, because that's when you often get the best advances.

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Washington, D.C.: In a rational, alternative universe your ideas are very good. The problem, of course, is that the GOP has decided that we need a 'do-nothing' Congress to have competitive Congressional races this November. And Bush is busy painting himself (with front-page coverage and assistance) as a fiscal conservative. (Remember the veto/veto threats over $22 Billion?)

While 'everyone' in abstract (and especially in David Broder's world) would like a non-partisan political environment, most people actually care about the results. These results have 'winners' and 'losers' and are the source disputes. The only compromise acceptable to the Bush administration and solid GOP minority Congress is one where the Democrats cave and pass the legislation supporting GOP position. ANY other legislation gets blocked by the 'Democrats did not get 60 votes needed to pass the legislation'.

Unless the GOP Congress is identified as the barrier to accomplishing anything and held accountable there is little likelihood that they will change their behavior. Of course, we could wait until January next year and a new post-Bush administration and (possibly) a new, more Democratic Congress, but until then your ideas are objectively good, but non-starters.

On 'shared-equity': How does this reconcile with the current overpriced housing market. Respectable opinion has looked at price/rent ratios and Case Schiller data and essentially come to the conclusion that any housing constructed after 2002 was overpriced when sold. Who is supposed to take the hit on housing declines? If the Government comes in to prop up current, unrealistically high prices doesn't that just put the government on the hook? This is especially problematic since so much of the housing price run-up was driven by investors.

Steven Pearlstein: We don't want to prevent the decline in housing prices to levels more consistent with incomes and retnal alternatives. That's true. But we also have this big foreclosure problem, and if we can do some workouts that keep people in houses with fixed monthly payments they can afford, that would be a good thing. The lenders would have to take a haircut, but in exchange they could get some of the upside on the house appreciation years down the road. That's a pretty standard workout strategy, and the shared-equity mortgage provides a way to do that.

The same mortgage could be used by builders, for example, to move unsold inventory. In other words, they might take less for the house now than they had planned in exchange for getting more later if and when the house appreciates. Then the builder could turn around and sell the traditional debt portion of the mortgage, and hold the equity coupon himself. That, too, would help the economy, help the housing market clear and put some new people into homes.

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Austin, Tex.: Stagflation: I remember the 70s, though I was only in my teens at the time. We had a free lunch economy for most of 2000-2007, tax cuts and big government. Now my kids and their kids are going to pay for our lunch again? I think we need to suck it up and pay for our own lunch and not charge it to our kids. Whatever happened to responsibility? The estimates for the WAR range from 500B to 1.5T, plus Medicare, Medicaid and SS. Why should our kids pay for this, which is what more debt really is?

Steven Pearlstein: They shouldn't, you're right.

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Tampa, Fla.: Re tax cuts: Why not make unemployment benefits exempt from federal income tax? First, I assume the multiplier effect would be high. People receiving unemployment benefits generally spend everything they receive. Second, it would eliminate double taxation. Under the current system, individuals cannot deduct their FUTA taxes (employment taxes) and then include income anything they receive as benefits. Third, it's easy to administer, as there's no potential for fraud.

As for business interests, they've already received plenty during the Bush administration. For example, multinationals received almost $7 billion of permanent AMT relief in the 2004 tax act. We are all aware of how Congress and the Administration has handled individual AMT relief. Further, I fail to see how business tax cuts will stimulate demand. That comes from the consumer sector, and that's where the stimulus is needed. I understand the politics of the situation, but I think Bush would have a hard time opposing tax cuts for low-income individuals without giving the Democrats a huge campaign issue, one that would make things hard for whichever Republican gets the nomination.

Speaking of the individual AMT, I must disagree with those claiming the failure to index the individual AMT exemption amount for inflation is causing the individual AMT to hit more and more taxpayers. The real cause was increasing the individual AMT rate from the original 20 percent flat rate to the present 26/28 percent graduated rates. In practice, it's really 28 percent. So I ask you: which would give individual taxpayers more relief--increasing the exemption or decreasing the individual AMT rate by similar percentages?

Steven Pearlstein: Not sure about making unemployment benefits tax free. Think it better to use the same amount of money to extend benefits, just because people without a job and no benefits probably need more help than people without a job receiving benefits.

On your second point, I strongly disagree. You can't think of this in terms of business doesn't "deserve" a tax break after all Bush had done for them. Let's cut out the judgmentalism here. The only questions are (1) would it help stimulate aggregate demand and (2) will you need that to build political support for the whole package. The answer to those question is (1) a little bit, certainly less than the business community claims and (2) Yes. So you include it.

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Steven Pearlstein: That's all for today folks. Thanks. "See" you next week.

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