Lebanon Valley Economists Plan Proposed Economic Stimulus Package

Lebanon Valley Economists Plan Proposed Economic Stimulus Package

Prospects for passage of an economic stimulus package appear to be getting closer with congressional leaders joining White House officials in negotiations to come up with a compromise plan. But two economists at Lebanon Valley College in Annville, Pa. believe the package under consideration is unnecessary and could actually harm the economy - for very different reasons.

Associate Professor of Business Administration and Economics Edward Sullivan studies macroeconomics, monetary policy and financial markets - recently writing a paper titled "Are Producer and Consumer Price Inflation Related," which is under review at the Journal of Macroeconomics. He believes all the Federal Reserve interest rate cuts haven't headed off a recession because "you can't push on a string" - meaning you can lower interest rates, but people still won't borrow if they're scared. He reports that monetary policy works in a long and variable lag of between nine and 18 months - meaning it was going to take time for the Fed's rate cuts to show any effect on the economy anyway.

Sullivan forecasts a quick recession, followed by accelerated inflation. "In a year-and-a-half, we'll be talking about how high the inflation is and the Fed will be telling us that they have to correct how high the prices are," he says.

Sullivan's also troubled by the economic stimulus package because he believes that recovery package - coupled with all of the Fed's rate cuts - will be a one-two punch that will actually stimulate inflation down the road.

"I believe the combination of the two (interest rate cuts and the economic stimulus package) is overkill at this point. Unemployment is still at only five-percent, and most of Europe would love to have that," says Sullivan.

Associate Professor of Economics Paul Heise studies public policy and the history of economic thought and shares Sullivan's concerns on the economic stimulus package. But Heise sees a much longer recession ahead and believes that not enough long-term economic thought is going into this plan - just some instant knee-jerk reactions that could harm the economy in the future.

Heise would know, being employed by the government as an economist from 1958-81 - working for the Office of U.S. Trade Representatives between 1977-81 where he provided trade adjustment assistance to the President's Office as a liaison with the labor movement and foreign investment in the United States. In the private sector, he was an owner and CEO of Datek Systems, Inc., between 1977-83 - a company that produced microcomputers and software.

His experience tells him that chief White House economic adviser Glenn Hubbard is giving bad advice if he really believes President Bush's proposal for up to $75 billion in tax breaks through this package would add at least half a percentage point to U.S. growth - creating more than 300,000 jobs over the next year. According to Heise, putting limited money in taxpayers' hands won't get them to spend it. They need something more long-term to overcome their current recession fears - like a dramatic increase in the minimum wage.

"They need to raise the minimum wage significantly. There's a lot of talk about the living wages - like the 10 or 11 dollars per hour wage the city of Baltimore has started. If you raise the minimum wage significantly, then people would know they'd have regular income coming in, and they'd go on spending it," says Heise.

Heise also theorizes that the social security tax is entirely too high. It was raised in the mid-1980s to try and assist the troubled social security ledger. But instead of generating more social security funds, Heise believes the bulk of it has been spent to reduce the federal deficit. Since that tax impacts everyone's paycheck, and hasn't been used for its intended purpose, he believes it's been taking money each payday away from the working poor. That's why he proposes reducing the social security tax back to three-and-a-half percent.

But raising the minimum wage and lowering the social security tax are also just quick steps that could jump-start the economy. Heise argues that "real" economic stimulation would require more careful research and long-term planning - not quick fixes.

"Business investment has gone down, and not for a lack of money. The Federal Reserve has already put huge reserves out there. The banks could be lending it, but they're not because people don't want it. People will invest when it's a good idea to invest, and they don't think it's a good idea to invest right now," he says. " If you give all these people this money and they don't think it's a good idea to invest, it's outrageous and a raid on the treasury. Are they going to invest and create jobs in a recession with that money? You need an increase in equity and demand - that will increase consumer spending. Don't give them one-time money because that doesn't do it. That doesn't change attitudes."

You may contact Sullivan by calling his office at 717-867-6102, or his home at 717-399-2974, or e-mailing him at [email protected]. Heise may be reached by calling his office at 717-867-6328, his home at 717-964-2019, or e-mailing him at [email protected].

Feel free to also call us at 814-867-1963, or e-mail me back at [email protected]. Dick Jones Communications assists Lebanon Valley with its public affairs work.

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