Does the economy need more stimulus?

John Dimsdale Dec 16, 2010
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Does the economy need more stimulus?

John Dimsdale Dec 16, 2010
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UPDATE 9:46 p.m. PT: At midnight tonight the House voted to approve the tax bill 277 to 148. Among Democrats, 139 voted in favor of the measure, 112 voted against it. Meanwhile, 138 Republicans voted to pass the measure, 36 were opposed. The $858 billion package now heads to the President for a signature as soon as Friday.

Kai Ryssdal: Here’s where we are on the House vote on the tax package. We’re waiting. Biding our time. Hanging around while House Democrats argue — mostly with each other — over how to deal with the estate tax.

When the vote does happen — and most everybody does expect the deal to pass — we’ll finally get a chance to see whether the economy really needed to be stimulated with more borrowed money. Our Washington bureau chief John Dimsdale has the latest.


John Dimsdale: The compromise keeps income and business taxes where they’ve been the last 10 years. It’s also designed to jumpstart the economy with a year-long 2 percent cut in Social Security payroll taxes, and companies also get a write-off new plants and equipment. President Obama says these tax breaks are necessary.

Barack Obama: I’m absolutely convinced this tax cut plan, while not perfect, will help grow our economy and create jobs in the private sector.

But the economy is showing fragile signs of a turnaround. Does it really need more stimulus? Or could the extra injection of government cash overshoot the mark and stoke inflation? Moody’s Analytics economist Mark Zandi says there’s a small chance of that. But he says the alternative, raising tax rates on all Americans, would be worse.

Mark Zandi: If we go back into recession, it’s going to be a world of hurt. There’s no policy response to that. Our deficits would balloon out. So it’s prudent to err on the side of perhaps doing too much rather than too little.

The tax compromise also adds hundreds of billions to the deficit. And some question whether temporary tax breaks deliver much bang for those bucks. Gerald O’Driscoll is a former vice chairman of the Dallas Federal Reserve Bank. He says the payroll tax reduction will hardly be noticed.

Gerald O’Driscoll: Because people know they’re temporary, they know they’re transitory and they’re going to save most of it.

And if Congress finds it difficult to let the payroll tax holiday end next December, O’Driscoll says the revenue loss will have real consequences for Social Security’s solvency.

In Washington, I’m John Dimsdale for Marketplace.

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