TODD BOULDIN
Director, The Pepperdine Voyage, and Asst. Visiting Professor of Social Science
“It’s the Economy Stupid!” reads the sign that hung on the wall at the headquarters of presidential candidate Bill Clinton in 1992.
President George W. Bush ran on his record of defending America’s interests in the Middle East and liberating the country of Kuwait from the invasion of Saddam Hussein, but it was the collapse of the American economy that turned the American people to a Democratic presidential candidate in 1992.
Fifteen years later, we are in a similar economic and political cycle. One thing is different this time: both the Republican and Democratic candidates agree that the economy is in trouble and requires some form of government action to stimulate it. The questions concern what the federal government should do, and how much.
There are, of course, libertarians and conservatives who believe that the government should let the markets correct their course and not intervene at all.
1. What is the current economic crisis?
There are aspects of the economy that are relatively strong, but the problems in a few critical sectors are causing global markets to fall and a possible recession in the United States economy. In the housing boom of the last decade, lenders made loans to first-time homebuyers and lower-income consumers at “sub-prime” rates that then “balloon” in the out-years to a higher interest rate that those buyers cannot afford. This has led to an increase in home foreclosures, and therefore to a squeeze on the credit available to businesses and consumers as banks fear they will be unable to recoup the funds they invested in the housing market.
If businesses have less access to credit, this means that businesses spend less on capital investments and the hiring of employees. Last month saw the highest jump in unemployment since 2001. This has led to recent steady declines in the United States stock market and global markets, which are finding that they are still closely tied to the United States economy despite the growth of economies like the European Union and China.
There are other problems, as well. Americans save little and mount up high debt. The United States dollar has been falling in comparison to other currencies, with the British Pound now worth almost 2 to 1 over the dollar, and the Euro is not far behind. This has a profound effect on trade and United States international travel. Oil recently hit $100 per barrel for the first time, and gas prices have led American drivers to limit their spending on other negotiable items, such as technology, furniture and automobiles. Most economists agree that we need an increase in spending to “stimulate” the economy. The debate is over how to best stimulate that spending.
2. What has the Federal Reserve done in response to the economic downturn?
The Federal Reserve Bank and its chairman, Bernard Bernanke, took emergency measures yesterday to rescue the declining markets by cutting the federal funds rate by 0.75, or three quarters of a point. Chairman Bernanke also has stated that he supports some form of stimulus package to increase consumer spending and to hold down inflation.
3. What do President Bush and the Republicans propose in response to the economic downturn?
President Bush has proposed a $150 billion stimulus package that favors investment tax credits and tax breaks for businesses that could create new jobs, as well as a temporary tax rebate to those whose income required that they file a tax return in 2007.
A stimulus package of this amount would be approximately 1 percent of total gross domestic product, an amount that President Bush believes is substantial enough to make a difference in our large economy.
President Bush and several Republican candidates also favor making the tax cuts of 2001 permanent, such as the elimination of the marriage penalty and the estate tax. So, businesses and investors can spend and invest knowing that taxes will not increase when these tax cuts sunset as scheduled in 2010.
4. What do the Democratic congressional leadership and the Democratic candidates propose in response to the economic downturn?
The Democrats, including presidential candidates Hillary Clinton and Barack Obama, favor regulatory reform for lenders, as well as one-time tax refunds and rebates targeted at low and middle income Americans. This population statistically tends to use tax rebates to spend on negotiable items, in comparison to the wealthy who tend to use a rebate for investments or to pay off debt.
The Democrats in Congress have proposed that those who paid no income tax in 2007, due to low incomes, also receive a rebate to stimulate spending, which President Bush and the Republicans generally oppose. It is estimated that 50 to 70 million Americans are seniors on fixed income who do not pay income taxes due to their low income. The Democrats also favor some measure to ease the mortgage crisis and to keep Americans in their homes.
01-24-2008