James Pethokoukis

Politics and policy from inside Washington

Harvard study: Obama stimulus should have focused more on tax cuts

Oct 28, 2009 18:48 UTC

Now they tell us. A new NBER paper from Harvard’s Alberto F. Alesina and Silvia Ardagna (“Large Changes in Fiscal Policy: Taxes Versus Spending”) makes the case for tax cuts over spending as stimulus:

As we well know a very large portion of the current astronomical 12 percent of GDP deficit is the result of bailout of various types of the financial sector.  … But part of the deficit is the result of the stimulus package that was passed to lift the economy out of the recession. About two third of this fiscal package is constituted by increases in spending, including public investment, transfers and government consumption. According to our results fiscal stimuli based upon tax cut are much more likely to be growth enhancing than those on the spending side. In this respect the US stimulus plan seems too much based upon spending.

Needless to say when considering a single episode many other factors jump to mind, factors which are difficult to capture in a multi country regressions. For instance, American families were saving too little before the crisis. An income tax cut might have just simply been saved and might have had not a big impact on aggregate consumption. However, more saving might have reinforced the financial sector, think of the credit card crisis for instance. In addition, one could have though of tax cuts that stimulate investment. Also, given the gravity of the crisis an increase in the generosity of unemployed benefits seems quite warranted both in terms of social justice and in terms of sustaining aggregate demand, since the unemployed probably save very little anyway. The benefit of infrastructure projects which have “long and variable lags” is much more questionable.

COMMENT

Drewbie,I have to admit that I’m by no means an economic expert. I do however see the flow of money from citizens that actually make up the economic engine, to merchants who’s sole purpose is profit extraction.If there were real value in what is being “produced” today then there would be no need to drive debt the way we have. We were encouraged by corporate america and also by government (because of business sector lobbying), to spend money we didn’t have, to buy things we didn’t need. We were given the blessing by the powers that be to support our country’s economic growth by way of consumption.But when this experiment failed, as it was bound to, those who are supposed to represent OUR (the citizen’s) interests, instead jumped to the aid of the business/banking sector (remember the too big to fail bs?), by giving them money to stay in business.It was money that should have gone to help citizens stay afloat while the business sector was shaped by the “survival of the fittest” philosophy they touted so loudly in the 80′s and 90′s.Instead they magically convinced our elected representatives that making sure THEY stayed in business was the only way for us poor folks to be properly served. As soon as they realized that we were focusing on paying down our own debts, we stopped getting any more “stimulus” checks.By the logic displayed in the actions of our country over the past few years, it’s easy to see that our system REQUIRES that a percentage of the population go homeless, hungry,uneducated, and sick. Otherwise there is no opportunity for profit.Even though the citizenry is too IMPORTANT to fail, our “representatives” did not serve our interests. They served their own interests and the interests of those who bring money their way.Only one president ago we spent money hand over fist to kill people in other countries because we SUSPECTED they intended to do us harm. We fought so hard for this that even when we realized the truth we still went ahead and spent that money up, and spilled the blood of our children, at the expense of our own people here at home.But now we have issues of health care and education and all of a sudden cost is a factor. How absurd is this? If we were willing to spend money we didn’t have in order to kill, then surely we can make some economic adjustments in order to ensure access to health care and quality of life.This is not a technical issue (who’s going to pay, how are we going to do it etc..).It’s simply an ethical one. We’ve already made the choice to spend money we didn’t have in order to kill.Now we have a new question before us. Should we make the effort to ensure a better quality of life for our people here at home, or not?

Romer: Unemployment likely to remain “severely elevated”

Oct 22, 2009 17:04 UTC

Watch CEA chair Christina Romer manage voter expectations:

Consistent with the recent cyclical pattern, the unemployment rate is predicted to continue rising for two quarters following the resumption of GDP growth. Whether this happens and how high the unemployment rate eventually rises will obviously depend on the strength of the GDP rebound. …  With predicted growth right around two and a half percent for most of the next year and a half, movements in the unemployment rate either up or down are likely to be small. As a result, unemployment is likely to remain at its severely elevated level.

WH econ adviser: Job market is really bad

Oct 20, 2009 17:57 UTC

Listened to an interesting talk today by Jared Bernstein, chief economist to Vice President Joe Biden, at a New America think-tank conference on job creation. A few observations:

1) If Bernstein’s talk was any indication, don’t look for much public celebration by the White House if we get some good 3Q and 4Q GDP numbers. As he put it, “Absent robust job growth, it is not a true economic recovery.” He stressed this point several times. I don’t even think you will hear an administration official use the word “recovery” in 2009.

2)  Bernstein trotted out several interesting slides — which I am hoping to get hold of — that displayed the severity of the job market’s woes. It really seems like the big problem is not so much layoffs as it is a lack of hiring. Thus the high numbers of long-term unemployed.

3)  He didn’t hint at much appetite for the grander second stimulus ideas like a job investment tax credit. (CBO would probably score such a plan as costing $75 billion a year or so, according to an earlier speaker.)

COMMENT

Nice. The American citizen is the engine that drives our economy and they put all of the gas in the trunk. None of the money is where it should be. No corporation ever needed a bail out. It was the citizen that should have been guarded from financial danger, not the corporations or the banks.

But the leaders we elected to serve the INTERESTS OF THE CITIZEN instead chose to serve the interest of the business sector. And this they do under flimsy excuse that it would be “good for the people” to save the sector that has been bleeding the people dry.

They care for profit and interest. They care nothing for your families and loved ones. They care nothing for your future. They only care about money.

Washington is a joke.

Follow the Japanese example on stimulus

Oct 16, 2009 13:21 UTC

The new Japanese government is redirecting the country’s stimulus plan (WSJ):

The Japanese government said Friday it will scrap part of the previous Cabinet’s stimulus package, freeing up 2.926 trillion yen ($32.38 billion) so that it can redirect the money toward more effective projects to stimulate growth.

Me:  For the cost of the remaining stimulus program in the US, you could cut the cap gains rate by 25 percent for a decade. (Plus it likely wouldn’t cost nearly that much.) Just an idea …

COMMENT

Typically, I’m a supply-sider as well, but there seems to be two problems with this line of thinking IMHO:

1. As far as I understand, much of the remaining stimulus is aimed at helping states through their budget crisis. While I don’t agree with this, it seems a bit late to go back now, given that states have already made their 2010 budgets.
2. What we need are jobs, not necessarily more consumer spending. A cut in the capital gains rate sort of encourages more investment, but it’s a long term process. A targeted jobs program (more than just a bunch of money thrown about) that accomplishes longer term objectives would be preferable. For instance, the US Government gives out zero interest loans and tax credits for all vehicle fleet operators to transition to natural gas. Investment, lower dependence on foreign oil, and environmental benefit. There’s a stimulus plan…

We’re gutting the middle class in this country. I’m not sure we need more tax cuts in the ‘trickle down’ theory. The Goldman bankers have enough money as it is…

Posted by John Thomson | Report as abusive

Zandi: Unemployment headed to 10.5 percent

Oct 12, 2009 13:44 UTC

Moody’s Economy.com economist Mark Zandi likes the stimulus (via Fox News) but still thinks unemployment is headed higher. In his own words:

10.5 percent is a very reasonable expectation for the peak in unemployment, but I think it would be measurably higher if not for the stimulus package. The stimulus in my view is working. It’s just gotten overwhelmed by the magnitude of the economic crisis.

Which, of course, brings us to the idea of a second stimulus.  Marc Ambinder gives the rundown:

1) Extend the first-time home buyer credit

2) Create a new credit for companies who hire

3) Extend jobless benefits in every state, or just particularly distressed states, or every state but even more in particularly distressed states.

4) Give tax refunds to struggling companies

5) Institute a payroll tax holiday

6) Pass another stimulus but call it something like “State Rescue Plan” and send most of the money to state governments

Stimulus vs. Unemployment

Oct 7, 2009 20:50 UTC

Correlation isn’t necessarily causality. Then again

100709stimulus

COMMENT

We’ll have November’s numbers in a few days.

Posted by Camron Barth | Report as abusive

A different kind of “second stimulus”

Oct 6, 2009 21:04 UTC

Larry Kudlow speaks or, rather, writes:

As for the second stimulus package, here’s my plan: Go for growth. Reduce tax rates to provide growth incentives, something Team Obama has avoided like the plague. Cut the top corporate tax rate from 35 to 25 percent, and accompany that with a small-business tax cut from 35 to 25 percent. And leave the Bush tax cuts alone. Don’t let them expire in 2011. That’s cap-gains, dividends, and the top personal rate.

Yes, this is a supply-side solution. Reducing tax rates will spur growth incentives. Forget about Keynesian spending multipliers, which Harvard’s Robert Barrow writes are less than one. Instead, borrow from George W. Bush, Bill Clinton, Ronald Reagan, and John F. Kennedy. (And Calvin Coolidge and Andrew Mellon, too.) Forget about Keynesian spending. Forget about class warfare. Forget about income redistribution. Go for growth.

Me:  Of course, what Team Obama is actually considering is more social spending and then a VAT to close the budget gap. Nor, apparently, does it seem to much care about the dollar, despite the ghostly presence of Paul Volcker. Weak dollar, high taxes, big budget deficits — an interesting mix.

A second stimulus?

Oct 5, 2009 14:37 UTC

A NY Times story by my pal John Harwood hints at a second stimulus package may be brewing:

Publicly, White House aides and Congressional leaders have responded with incessant attempts to highlight benefits from the $787 billion economic stimulus package they enacted earlier this year. Privately, Mr. Obama’s economic advisers are sifting options for a new package of tax cuts and other job creation measures to be unveiled in next year’s State of the Union address — or earlier if pressure for action becomes irresistible.

Me:  They certainly won’t call it “stimulus,” which is a toxic word these days. I could see more aid to state and local governments, an expanded housing credit, expanded unemployment benefits. They could surprise with a payroll tax cut. But any pricey packages could be met by a negative bond market reaction. They would really, really like to avoid doing this.

Why the US budget deficit is worse than you think

Sep 25, 2009 14:40 UTC

The great Dan Clifton of the Strategas Research finds this gem:

Douglas Elmendorf, director of the Congressional Budget Office, told the National Economists Club that today’s deficits are more troublesome than in the early 1980’s. Projected deficits are twice the deficit in the early 1980’s but more importantly there is a growing disconnect between current law and provisions set to expire which will eventually be extended. Most notably there is (and will be) growing pressure to extend the expiring stimulus provisions in addition to the usual expiring provisions.

Me: See, while tax cuts get sunsetted, spending programs never die. And this is why the $800 billion stimulus is going to cost a lot more than $800 billion.

COMMENT

The budget deficit is the most significant issue at the federal level.

Posted by Camron Barth | Report as abusive

McCain and stimulus: a counterfactual

Sep 7, 2009 15:35 UTC

From Brad DeLong:

Had John McCain won the presidential election of 2008, at the start of 2009 he would have in all likelihood proposed a trillion dollar fiscal stimulus bill–3/4 tax cuts and 1/4 aid to states–and he might have picked Tim Geithner for his Treasury Secretary. Democrats would have called for fewer tax cuts, more state aid, and some government infrastructure spending initiatives in the fiscal policy mix, but the need for the government to cushion the recession would have brought them into line. When Obama took office he bid $800 billion for his fiscal stimulus bill–about 1/3 spending, about 1/3 aid to states, about 1/3 tax cuts–thinking that would be a plan that would win broad bipartisan assent. And he was wrong.

Me: I agree that he would have “spent money” by cutting taxes more. But there is every reason to believe that large payroll tax cuts may have better met the “targeted, timely and temporary” formula. And been more effective. Thus they could have been smaller. And then Congress could have passed a separate infrastructure bill for repair  ofvboth our transportation system and upgrading the grid.

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