By Walter Williams, UW emeritus professor of public affairs, and Bryan Jones, UW professor of political science 

As the United States teeters on the verge of recession, the emerging view is that the branches of government responded with notable swiftness to enact an economic stimulus package. Glowing accounts of the striking bipartisanship came forth from the president and congressional leaders of both political parties as well as mainstream analysts.

Quick, however, is not necessarily good. The stimulus package does not come close to bringing the biggest bang for the buck, despite widespread agreement among respected economists across the political spectrum about the most effective options.

One-third of the costs go for a business tax break that cannot help, while two options rejected by the Bush Republicans -- extending the unemployment benefits and increasing food stamps -- are actually six times more effective in stimulating economic activity per dollar of costs than the costly business tax break.

Rather than see the stimulus package as a political and economic success, we see it as a mark of the continued failure of the political system to face problems and design policies directed at ameliorating them.

First, the experience with the economic stimulus package shows clearly that the federal government now lacks the capacity to cope with the massive economic problems that are pushing the nation toward second-class economic status.

Second, the source of this inability is the unshakeable ideological belief of President Bush and the Republican Party that income tax cuts are the cure-all for the nation's economic problems. This core belief led to a flawed stimulus package, a repeat of the bad logic leading to the administration's 2001 and 2003 tax cuts.

Third, the 2008 legislation has many of the same flaws as the earlier tax cuts that put the U.S. on the path toward fiscal insolvency, left the middle class in the worst financial straits in the post-World War II era, and brought the widest income inequality since the 1920s-effects we document clearly in our new book, "The Politics of Bad Ideas: The Great Tax Cut Delusion and the Decline of Good Government in America."

We watched in horror as the president and Congress traveled the same road to pass the ineffective economic stimulus package. It seems like we are seeing the movie sequel titled TAX CUT DISASTER III.

As in the first two movies, the ideological commitment to the Great Tax Cut Delusion has been buttressed by Bush's refusal to look at plain evidence of how severely the 2001 and 2003 income tax cuts damaged the fiscal balance sheet of the nation and the health of its economy. This intransigence has been aided and abetted by the continuing reluctance of the congressional Democrats to take a stand against Bush's destructive tax cuts.

A stimulus package similar to the final bill had been negotiated in the House by Treasury Secretary Henry M. Paulson, Speaker Nancy Pelosi, D-Calif., and the House Republican leader John A. Boehner of Ohio. It provided full rebates for most tax filers of $600 for individuals up to $75,000 of income, $1,200 for couples up to $150,000 and $300 per child.

Those earning at least $3,000 a year but paying no income taxes receive $300 per individual and $600 per couple. The main business tax cut allows for "accelerated depreciation."

There is widespread agreement among respected economists of different political persuasions on the impact of available options for stimulating the economy.

Mark Landi, the chief economist of Economy.com, has assessed various tax and spending changes by determining the increased economic activity per dollar of cost. The greater the increase in economic activity for each $1 of outlay, the greater will be the effectiveness.

Landi found the most effective option to be a temporary increase in food stamp benefits that yields $1.73 additional economic activity per dollar of cost. A close second is extending unemployment benefits at $1.64 in increased activity for each $1 paid to the eligible unemployed.

The director of the nonpartisan Congressional Budget Office, Peter Orszag, observed: "Food stamp and unemployment benefits can affect spending after two months, rebates would affect spending at the end of 2008." The Congressional Budget Office rated options on three criteria: cost-effectiveness, timeliness and certainty of effect. Unemployment benefits and food stamps were the only options to win CBO's highest rating as an effective stimulus in all three categories. No other option received the top rating in more than one category.

Accelerated depreciation write-offs -- the main tax cut for business in both the House and Senate --yields $0.27 in economic activity per dollar of tax cut. Thus, its impact per dollar of cost generates one-sixth as much economic activity as that of a dollar in food stamps or unemployment benefits. And the tax cuts cannot be implemented until late spring or summer at the earliest, while unemployment insurance and food stamps could have an effect almost immediately.

Democrats and Republicans made important trade offs in the House package. But the latter shaped the package both by forcing through the roughly $50 billion for business and blocking any benefits for food stamp and unemployment insurance benefits. The $50 billion for benefits to business that the Republicans demanded as the "price" for their support of the stimulus package rendered the $150 billion legislation marginally effective at best.

Senate Democrats lost in their fight for food stamps and unemployment insurance. The GOP won again in the case of a $300 payment to 20 million Social Security recipients and 250,000 disabled veterans after strong protests from the aged and veterans lobbies. The House quickly agreed to add a $300 rebate to the bill.

Senate Majority Leader Harry Reid, D-Nevada, sought to bluff the Republicans. He threatened to put up for vote only the Senate bill that included unemployment insurance benefits and the House legislation without the $300 rebates for Social Security recipients and disabled veterans. But he backed down and the Republicans added not only the $300 tax rebates but an amendment disqualifying illegal immigrants.

One can view the legislation as a victory over gridlock and partisan bickering. The stimulus package gained wide praise as a good bill mainly because it seemed to feature the kind of hard work and compromise by the two parties that had vanished in the Bush presidency. Yet the final legislation is an overwhelming victory for Bush's tax cut ideology over sane economic reasoning.

Why did the Republicans refuse to use the two most effective options developed by highly reputable experts? We can find no explanation in any of the usual suspects: The package was not sensibly designed to stimulate the economy, and, if politicians are held accountable for economic performance, it was not designed to help them stay in office.

In particular, Republican true believers refused to deviate from what the authors call "The Great Tax Delusion," in which tax cuts are the optimum fix for economic ills whatever the "facts on the ground."

Republican tax cut dogma rules out budget expenditures such as unemployment benefits or any other highly effective spending programs on ideological grounds alone. In contrast, the belief in the force of business incentives to stimulate investment is impervious to either economic reasoning or sound evidence showing how poorly this option works.

A September 2007 report by the major Wall Street investment firm of Goldman-Sachs made the point that companies invest money on hand if the expected returns are likely to exceed the costs of a new project, "and that usually requires growth in demand strong enough to put pressure on existing resources."

In the case at hand, it does not take training in graduate level economics, only a little common sense, to figure out that the declining demand in the current downturn makes investments unattractive even if funds are available.

Research gave the same answer. In their Federal Reserve study of the effects of the accelerated depreciation incentives initiated in 2002 and increased in 2003 to stimulate the weak economy, the researchers found "only a very limited impact" at best on new investment.

The Democrats did force the Republicans to improve the economic stimulus package somewhat, but The Great Tax Delusion still dominated the final legislation. Despite this, the economic stimulus package -- a replay of the 2001 and 2003 tax cuts that warrants the label TAX CUT DISASTER III --won praise as the kind of bipartisanship needed in the federal government.

Putting the business benefits in the final legislation is the opposite of real bipartisanship. Bush intransigence and the Democrats timidity produced a bill that had none of highly effective stimulus options and wasted one-third of the total funds on business benefits shown to be ineffective by economic reasoning and research on a similar earlier effort.

The almost-uniform praise by the chattering classes and the press of a process that led to a flawed economic stimulus legislation as exemplary bipartisanship is deeply disturbing, bordering on a national delusion.

Rather than coming to praise this process, we'd like to bury it. It is just one more depressing example that the federal government lacks the will to cope with the major economic problems that threaten the United States.

For seven years, the Bush's tax cut ideology has trumped reality, harmed the nation's economy and its governing institutions, and pushed the middle class into the worst financial mess since the Great Depression.

The Great Tax Cut Delusion and its false promise of a free lunch for the American people must be cast aside as a patent medicine dangerous for the nation's health. If not, we risk speeding rapidly toward a second tier economy and a vanishing middle class.

"False Promise of Free Lunch," by UW Professors Walter Williams and Bryan Jones, posted Friday, March 21 to blogs.uwnews.org. UW news blogs is a service of uwnews.org, the University of Washington Office of News and Information.

By Bryan Jones, UW professor of political science

Back again is that successful Seattle company, Washington Mutual.  I noted here not long ago that WaMu paid its executives bonuses even though they lost almost two-thirds of the company's value (assessed by its stock price) during the year.  Today a Wall Street Journal article reports that the company has devised a new strategy for giving its executives bonuses that holds them harmless for losses involving the bad mortgage loans they authorized. 

Socialism for the rich, free enterprise for the poor....

By Bryan Jones, UW professor of political science

Many (including me) have marveled at the support Obama draws from professed liberals, given his more conservative domestic policies in comparison to any of the other Democratic contenders, even those who have withdrawn.

One hypothesis is that they are generally better off and don’t feel the rising inequality that stalks America today. Another is that they applaud his staunch anti-Iraq record, but his stated position is more conservative than either Edwards or Richardson. Or perhaps they are not supporting on the issues.

In any case, Obama’s message of "one America" contrasts strongly with Edward’s "two Americas." It is of course possible that Obama is professing this notion for electoral reasons, but then that would make him a politician, wouldn’t it?

Katherine Sebelius, the governor of Kansas who just endorsed Obama, gave the Democrats' response to the State of the Union speech on Monday. Low key for sure, but far more confrontational in content than Obama, yet not in tone. While Obama touts the "one America'" Sebelius talked of a "new American majority"—clearly a progressive one, but one not based in the more confrontational rhetoric of Edwards.

Obama might study that speech in detail for a somewhat new direction in what I find a tired old reformist pitch in American politics.

Obama links his rhetoric to JFK, but I think that is the wrong link. The most successful insurgent campaign in the Democratic party in modern times was not John in 1960 (he was pure establishment) but Bobby in 1968. He excited the young, spoke eloquently of racial injustice, yet was enormously popular with working-class Americans. “Clean Gene” McCarthy was the classic reformer, but Bobby had working class appeal. Are there lessons for Barak here?

By Bryan Jones, UW professor of political science

A few days ago, Washington Mutual, the nation’s largest savings and loan, announced bonuses for its top executives. During the year, the management team had managed to lose almost $2 billion and engineered a stock price drop that cost shareholders two-thirds of the value of the company. The bonuses were substantially less than the year before, but bonuses are bonuses—supposedly pay for exceptional work.

This happens all the time. There is a safety net for the paid managers of America’s companies—they benefit no matter how poorly they perform. Conservative economists are fond of saying that if you reward bad behavior, you’ll get more of it. So in effect, today’s crony capitalism in America is building in the guarantee that we will get more poor-quality capitalism.

I am really not sure why the issue of gross inequality has not come to the fore in the presidential campaign. All the Republican candidates save Huckabee think things are hunky-dory. Obama wants to avoid such talk because he fears making anyone mad, especially the independents and Republicans he courts. Hillary raises money from them. Only Edwards, who has found little traction, is courageous enough to talk about the class warfare that the rich have mounted against the rest of us.

By Bryan Jones, UW professor of political science

The Congressional Budget Office has just released its estimate of the Fiscal 2008 federal budget deficit—about $220 billion dollars. In August, the CBO estimated $155 billion, but the slowing economy has altered the equation. The Office of Management and Budget, based on slightly different assumptions, estimates a budget deficit of around $250 billion. Neither agency includes the cost of the wars in Iraq and Afghanistan (almost $120 billion), nor the cost of the proposed stimulus package (estimated currently to be around $150 billion). This would yield an estimated budget deficit of around $500 billion.

These deficits add up to the national debt, what we as a nation owe. Along with explicit liabilities, such as military retirements, the government owed $10.4 billion in 2006, up 52% since Bush took office.

But wait! There’s more.

Comptroller General David Walker reports that the government’s fiscal balance sheet is in dire straits. In 2000, the government’s accumulated obligations were about $20 trillion; by 2006, that has ballooned to over $50 trillion—an increase of 150%. Much of this is due to the drug benefit that was added to Medicare; the rest is due to cost escalations in Medicare. Walker is so concerned that he has gone on tour to publicize the problem. A summary of Walker’s Fiscal Wake Up Tour may be found at: http://www.gao.gov/cghome/d08353cg.pdf .

There are two components to the balance sheet. The first is the national debt --what we have borrowed and owe to specific individuals, organizations, or governments. The second consists of promises the government has made for future commitments, particularly Social Security and Medicare.

So Social Security is one major component of the dismal federal balance sheet, but the Medicare (including the new drug benefit provision, Part D) accrued obligations are more than five times the obligations under Social Security.

In 1983, the federal government made a bargain with working Americans—those who pay payroll taxes and rely on Social Security for their retirements. At the time, the Social Security system was bankrupt, not able to make payments in literally a few months. President Reagan and Congress in effect told working Americans that if they would pay higher taxes and tolerate delayed benefits, we will make Social Security solvent forever. They actually came close; the system is solvent until 2041.

The bargain worked like this: Workers would pay enough in taxes to allow the Social Security Administration to pay retirees and save a lot of money--basically by buying US savings bonds--for the future, especially when the huge Baby Boom generation retired. When they did, the Social Security Administration would sell its bonds, and continue to pay its obligations. That will happen in 2017, according to the Report of the Social Security Board of Trustees. [I have reproduced the two key charts from this report below. You can read the full report at: http://www.socialsecurity.gov/OACT/TRSUM/trsummary.html].

If George W. Bush had run a responsible fiscal policy, this would be a non-event. Balanced budgets, continuing the fiscal policy established by Bill Clinton, would have provided the cushion when the Social Security Administration needed its money. Instead, he worked to undermine the bargain Government made with working Americans, basically blaming them for his fiscal irresponsibility.

President Bush preferred fiscal deception, claiming in 2005 that the Social Security System was somehow broken and would not be able to pay its obligations to future generations. Indeed, as Walt Williams and I have shown in our new book, The Politics of Bad Ideas, Republican economic policies in general have been built on a set of claims that, like the Social Security bankruptcy claim, are false. The Social Security claim is part of a pattern of deception on economic policies.

What has happened is that Bush borrowed the Social Security surpluses and spent it, mostly through his massive tax cuts. Then he blamed working Americans for simply acting responsibly… basically for contributing to their retirements through Social Security and planning to use it when they retire. Because of his irresponsibility, 2017 looms as a critical date.

What can we say about the Federal balance sheet? First, the Social Security system is sound. It has set aside enough money to pay retirees through 2041. It would be better if we made some modest adjustments to make the system solvent forever, but we have plenty of time for this.

Second, the debt the U.S. government owes the Social Security system is sound, unlike what some conservatives claim. The Social Security Administration simply holds U.S. government Bonds, as does the Chinese government, the Federal Reserve, your pension plan, and many British, Japanese, and American citizens. Why would the government pay the Chinese but not its own elderly? A debt is a debt.

Third, the Medicare system is not sound. It is in deep fiscal trouble. Two major reasons are the Bush prescription drug benefit and the Bush tax cuts.

Fourth, the federal government under Bush is out of control. It has shown an inability to control its balance sheet. It has promised grand new Medicare benefits, fought an incredibly expensive war, and passed out huge tax cuts, mostly to the well-off.

Blaming working Americans relying on Social Security was not only wrong factually, it was class warfare—with the working American as the target.

Social Security Trust Fund Balances