Economic Stimulus For the Long Haul
No one should be surprised that a powerful political steamroller has developed for a second economic "stimulus" package. Federal Reserve Chairman Ben Bernanke has blessed the idea, and even President Bush has provided vague support. Some congressional Democrats urge a $300 billion plan; some private economists propose up to $500 billion. The case for "stimulus" seems obvious. It's extra insurance against an economic free fall. No one wants a perverse cycle of falling confidence, production, jobs and stocks leading to more loan losses and financial failures -- which then depress confidence, production, jobs and stocks.
Still, the case isn't airtight. The first $152 billion stimulus earlier this year had only a modest effect. Americans saved perhaps three-quarters of the personal tax cuts that were the centerpiece of the stimulus. The same might happen with new tax cuts. One popular idea to aid states and localities with money for roads and other infrastructure improvements might take so long to begin that it would provide little immediate economic boost. Moreover, the economy does have self-correcting mechanisms. Lower home prices already show signs of spurring more buying. Falling oil prices now provide some support for consumer spending.
But if Congress and the White House do proceed, they should rise above self-indulgence. The great danger is that a new stimulus will become an excuse for politically pleasing tax cuts and spending programs that have only a modest economic effect and do nothing to improve the long-term outlook. What we really need is a package that also addresses the future.
Herewith, three proposals.
First, let's not let lower oil prices permanently filter through to consumers. We've seen this movie before. A surge in oil prices produces calls for conservation, less dependence on imported oil and more fuel-efficient cars. Then oil prices drop, and we revert to our energy-wasting habits. This sets us up for the next price surge or any politically motivated cuts in foreign oil production.
My suggestion: Raise fuel taxes the equivalent of one cent a gallon per month for four years (total: 48 cents). For now, consumers would benefit from most of the lower prices, but they'd also be on notice that prices won't permanently stay down. To offset any depressing effect of higher fuel taxes, we could lower other taxes in lock step. But the signal of higher long-term prices should affect Americans' driving habits and vehicle purchasing preferences. Congress has increased fuel economy standards for new vehicles from today's 25 miles per gallon to 35 mpg by 2020. But it must also create a market in which buyers favor fuel efficiency.
Second, we should increase the earliest age that workers can qualify for Social Security from 62 to 64. This change (again) should be phased in over four years. When people retire early, they take a cut in their Social Security benefits to reflect the fact that they'll receive benefits longer. At 62, benefits now average about 75 percent of benefits at the normal retirement age (today, 66 years). Many retirees later regret that, by starting benefits so early, they crimp their monthly payments.
Raising the minimum eligibility age wouldn't save the government much, if any, money on the assumption that the monthly payments at 64 would be higher. Although people would work longer, their retirement would ultimately be made easier by higher monthly benefit checks and by delaying by two years the need to rely on savings. This change would also indicate Congress's willingness to tackle the larger problems of Social Security and Medicare.
Finally, Congress should explicitly authorize offshore drilling for oil and natural gas in the Atlantic, Pacific and Gulf of Mexico. Last month, Congress let lapse the long-standing bans against this drilling. But Congress might try to reimpose some type of ban, citing lower prices. This would be a mistake. Exploration and production can be environmentally safe. At best, it will take years before new projects begin producing and thereby limit dependence on insecure foreign oil. Why wait? America's huge foreign oil bill weakens our economy but also destabilizes the world economy. Oil producers don't spend all they earn, dampening worldwide demand.
I am not naive. These are all controversial ideas. The odds against their enactment are perhaps 100 to 1. But wouldn't it be refreshing if politicians disproved the conventional wisdom that they will do only (a) what's popular or (b) what crises compel them to do? Wouldn't it be a pleasant surprise if the president-elect -- whoever he is -- could work with the present Congress to produce a package that addressed both the present and future? Now that would be real change. Heck, it might even improve confidence.