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All's Not Fair in Class Warfare

by Victor Tan Chen

DollarheartIf there's a lesson from the recent debacle over an economic stimulus package, it's this: Republicans need to stop engaging in class warfare.

Class warfare, as the Republicans have pointed out time and time again, is when public policy is unduly influenced by the interests of one group at the expense of everyone else.

Unfortunately, the Republican leadership has been guilty of such hypocrisy in its negotiations over individual tax rebates in the economic stimulus package, which the Senate approved last Thursday. First there was talk of making any legislation contingent on extending President Bush's tax cuts for the wealthy. Then the Republicans sought to kill proposals to extend government checks to the poor, while demanding tax rebates for wealthy Americans. And they stamped out an effort by Senate Democrats to lengthen unemployment benefits.

So, how is this class warfare? An effective stimulus package, according to economists ranging from Ben Bernanke to Martin Feldstein to Lawrence Summers, should be timely, temporary, and targeted. Targeting the stimulus means putting money in the hands of poor and middle-income households. They're more likely to use that money to buy things rather than saving it or using it to pay down debt. (See these articles by economists Paul Krugman and Mark Zandi for more on this point. For some contrarian views, see this summary of recent research on tax rebates -- though it's axiomatic in social science that you shouldn’t put too much faith in surveys of what people say they will do in the future.)

Missingclass The legislation that both houses of Congress approved will give some benefits to the poor -- a $300 tax rebate check to individuals with at least $3,000 in income -- but many will not receive the $600 maximum rebate for individuals or $1,200 maximum for couples, plus $300 per child, because they do not pay enough income tax. (This is also true for certain segments of the near poor, the group that Katherine Newman and I study in our book The Missing Class.) In passing their own version of the legislation yesterday, the Senate also extended tax rebates to Social Security retirees and veterans with disabilities, though, as for the poor, the benefit will be just $300.

Among the poorest Americans, those in the bottom income quintile, only 71 percent [pdf] have savings or checking accounts. Among families one quintile above poor, 89 percent do. As for the rest of Americans, their rate is almost 100 percent.

In other words, poor people save less. Any money that finds its way to these households is more likely to go toward buying things that people need. And since consumption accounts for more than two-thirds of the nation’s economic activity, people -- and the more people, the better -- need to start buying things if the economy is going to pull out of its downward spiral.

Affluent families, on the other hand, tend to use a smaller portion of their incomes to make purchases -- at a certain point, there's not much more to buy -- and so any windfall that comes their way ends up in a bank or stock portfolio. While good for their retirement prospects, this kind of asset-building won’t do as much to grow the economy as going out and buying food, clothing, electronics, and other goods that keep companies in the black and keep workers employed.

To be effective, economic stimulus also has to be timely. That means relief should begin today -- not four or more months down the road, which is when the proposed legislation's rebate checks are expected to go out. Yet temporary extensions of food stamps and unemployment insurance could have taken effect almost immediately. It's a matter of instituting simple rule changes for preexisting benefits, as opposed to putting in motion a bureaucratic juggernaut of one-time tax rebates.

What's more, increases to food stamps and unemployment insurance would have been, by definition, targeted at the poor and unemployed, who again are the most reliable spenders and thus the key to raising levels of consumption and growing the economy. In fact, this analysis by economist Mark Zandi finds that jobless benefits and food stamps are even more effective than tax breaks in growing the economy.

Instead of following this economic logic, the Republicans in Congress have engaged in class warfare. They rebuffed any action on food stamps and now they’ve blocked an extension of unemployment benefits. They've consistently tried to steer the legislation toward the interests of the wealthy. (Here I'm talking specifically about the debate over individual tax rebates; the Senate proposals also included a variety of tax breaks for the coal industry and other businesses, so they had their fill of pork cooked up on the other side of the aisle, too.)

Economic stimulus is not about tax cuts for all, and especially not the wealthy. It's about promoting consumer spending, and it should be seen for what it is: an investment, much the same way as we invest in roads and schools. By investing in working families who will head out to supermarkets and department stores with their rebate money, we can boost economic activity and pull the markets out of their doldrums. But that kind of investment should be made according to economic science, not the special interests of politicians.

Never mind that these families pay their share of sales taxes and Social Security and Medicare taxes -- in fact, more than their share, considering that regressive sales taxes swallow a larger chunk of poor households' incomes than they do for more affluent Americans, and Social Security taxes only apply to the first $100,000 of income. The stimulus money should go to these families who most need it and who are most likely to spend it.

Unfortunately, the Republicans held their ground in the class war. Poor and middle-class families will be shortchanged by the approved legislation, and the quickest-acting methods of stimulus -- food stamps and jobless benefits -- remain in legislative limbo. (Democrats say they'll take up the cause later, but there's no reason for Republicans to sign on now that they got their tax rebates.) So, while the economy continues to sour, struggling families will still be waiting by their mailboxes come summer for that all-too-light check in the mail.

Victor Tan Chen is the founding editor of INTHEFRAY Magazine and the coauthor, with Katherine S. Newman, of The Missing Class: Portraits of the Near Poor in America.