Commentary: Bailout Package Signed into Law; Economic Stimulus Still Needed
With the enactment of a $700 billion Wall Street bailout, or "financial rescue" package, prospects for success in stabilizing the nation's financial markets remain uncertain. Certain, however, is that deteriorating economic conditions that continue to put Americans on the unemployment rolls will remain unaffected by the implementation of the Troubled Asset Relief Program (TARP). And despite over $100 billion in tax cuts included in the package, Congress failed to leverage even modest economic stimulus from the resulting jump in the federal budget deficit. If and when Congress returns to work for a lame-duck session after the elections, it should consider what steps to take next to improve the economy and aid those who have fallen victim to it. The Emergency Economic Stabilization Act of 2008 (H.R. 1424) was signed into law on Oct. 3, hours after the House overwhelmingly approved the bill by a 263-171 vote. The act grants the Treasury Secretary $700 billion to purchase troubled mortgage-related financial assets, but it also extends dozens of miscellaneous energy, individual, and business tax cuts and a one-year "patch" for the Alternative Minimum Tax. No one can predict the ultimate cost of rescuing Wall Street from itself, nor is there consensus among economists that the bailout will even cure what ails the financial system. Yet, for all the five hundred pages of the new law, the plan was not engineered to abate the march of the economy toward recession.
On the day that President Bush signed the bill into law, the Labor Department reported that the economy lost 159,000 jobs in September, adding to a nine-month streak of payroll contraction resulting in a 6.1 percent unemployment rate, the highest since 2003. However, TARP was not intended to aid an economy that may already be in recession; it was designed to prevent a catastrophic collapse of the financial markets that would deepen and prolong the looming recession. Not a single cent of the $700 billion program is to be directed toward stimulating the economy or helping families cope with rising unemployment.
Congress did not adequately address the needs of millions of Americans before it adjourned Oct. 3, while the implementation of the tax cuts in the act will actually diminish the possibility for future economic stimulus and assistance. The attendant deficit (and national debt) hike caused by the more than $107 billion in unpaid-for tax cuts will ultimately increase political pressure on Congress to curb spending. And because of a $600 billion, bipartisan commitment to continue growing defense and national security spending, programs for supporting families, infrastructure investment and repair, education, and health care will be moved to the front of the line for the chopping block. Some of the tax cuts included in the package will help low- and middle-income families, like the expansion of the child tax credit, but without fiscally responsible offsets to these and other revenue losers, record-setting deficits will ultimately undermine their goals.
This is not to say, however, that all deficit spending is not worth the price of borrowing. When the economy begins a down cycle, millions of workers lose their jobs while even more are forced to take part-time work that falls short of meeting demands like rent, groceries, gas, and utilities. Extending unemployment insurance, expanding the Food Stamp and other nutrition programs, boosting home energy assistance, and increasing Medicaid spending not only provide assistance to those who need it most but also carry an added economic benefit: These targeted spending programs boost the economy by stimulating aggregate demand. The kinds of tax cuts passed by Congress, like extending a dollar-per-gallon credit for biodiesel makers, decreasing excise taxes on rum, or cutting $100 million in taxes for "certain motorsports racing track facilities," do little to aid those affected by the economic downturn while inducing deficit increases that make investments in families more politically difficult to enact.
TARP, continued tax cuts that aren't focused, and unwise spending are a prescription for future failure. The next administration will face a Congress that expects more tax cuts and more favors for districts back home. But the cycle of further untargeted tax cuts simply cannot continue. Focused federal spending, such as rebuilding infrastructure instead of going to war, can help provide the stimulus to help middle-income America and kick start the economy. The problem is not deficit spending; the problem is unwise deficit spending — and continued untargeted tax cuts are part of the problem.
TARP may or may not prevent the cataclysmic breakdown of the nation's financial markets as it was designed to do. However competent and successful the execution of the bailout (details in the law on implementation of TARP are sparse), the rescue legislation still does not deal with the wild ride of building up national and international debt and continuing to leverage it through so many derivatives that even Wall Street professionals no longer understand. The latest hot-button topic is the estimated $60 trillion in credit-default swaps built on about $6 trillion in bonds. (Credit-default swaps are a type of unregulated insurance that has become a market of runaway speculation.)
Perhaps more importantly, addressing Wall Street, no matter how important for stabilizing credit flow, will not improve the lot for the millions of unemployed workers and those on the edge. By widening the budget deficit with the passage of billions of dollars of unnecessary tax cuts, Congress has worked against itself to pass another economic stimulus package. Regardless of a heightened barrier to passage, Congress should begin crafting a set of timely, targeted, and temporary spending measures to cushion the blows of the economy against families and mitigate the duration and depth of the coming recession.