As talk of stimulus plans grows, readers are asking for my thoughts. Which are: stimulus rarely works unless it is massive and very rapidly applied, and if it is massive and very rapid, it usually has much larger problems.
The difference between tax cuts and spending is irrelevant in theory. In practice, because so few people pay significant income tax, it has distributional effects. Since rich people seem to save more money than poor people, this blunts the effect of the stimulus. On the other hand, spending is generally much more distortionary than tax cuts, because the government picks what the money is spent on. One more reason not to like fiscal stimulus packages.
The most interesting point, which no one is paying much attention to, is that it may matter how you frame the stimulus. The fiscally responsible thing to do is to make the stimulus temporary, something Clinton is emphasizing in her speeches. However, there is some evidence that if you tell people your stimulus is temporary, it doesn't work so well. This matters particularly with tax cuts: Nicholas Epley of Chicago (then Harvard) has a paper indicating the Bush administration's decision to frame its stimulus as a rebate, rather than a bonus, may have affected its usefulness.
Those who sailed when they were young will remember the result of pointing Percy upwind when they relieved themselves.
Nicholas Epley of Chicago (then Harvard) has a paper indicating the Bush administration's decision to frame its stimulus as a rebate, rather than a bonus, may have affected its usefulness.
Megan, Please do your readers a favor and never write empty phrases such as "may have affected its usefulness" because they convey absolutely no information.
Say *how* something affects, not merely that it "may" affect. At the very least use an adverb such as "positively" or "negatively".
"The fiscally responsible thing to do is to make the stimulus temporary, something Clinton is emphasizing in her speeches. However, there is some evidence that if you tell people your stimulus is temporary, it doesn't work so well."-MM
The second part is basically correct. The marginal propoensity to consume out of a temporary boost in income is low. This follows from the Permanent Income Hypothesis and there is abundant (not just some) evidence for it. Thus, temporary stimulus doesn't stimulate (not much, anyway).
The first part is not correct. The best course woud be to offer permanent tax cuts, and then to bring spending down as the economy recovers. Such a program would be at once stimulative, fiscally responsible and economically efficient.
All too often "fiscal responsibility" is just a pretext for tax increases. But what matters most is the size of government, not the size of the deficit, and permanent tax cuts are the best way to force the government to shrink.
The expiration of the tax cuts is a tax increase for those of us who pay them.
Congress can't bribe me with my money. I'm not stupid. A one time rebate ahead of a scheduled tax increase won't fool anyone. Cut Federal spending, as rwe has noted.
Bush could also just refuse to spend any earmarks that are not a part of the appropriation legislation.
For those who are interested, Bruce Bartlett explains further why permanent tax cuts are far more effective than temporary ones here.
By the way, Megan, the Epley paper you linked to was very interesting. As a practical matter, though, I doubt that George Bush would fool anyone by calling it a "bonus" rather than a "rebate." Only permanent tax reductions are likely to stimulate aggregate demand significantly, though of course their supply-side effects are of much more interest to me.
That's enough. I have work to do.
The Bartlett WSJ article seemed more an indictment of "rebates" than a call for permanent tax cuts. I saw no explanation of how permanent cuts would be more effective; just argument about how "rebates" would be ineffective. I do agree with him (and you) on that narrow point.
I can just imagine which Federal spending cuts you guys would advocate "bring[ing] down...as the economy recovers." Like a broken record...
You need to convince me and mine why not having social spending is a good idea. Until that happens, we're going to fight you tooth and nail. From our point of view, if it means higher taxes, so be it.
Here is Paul Krugman, from his book "The Conscience of a Liberal:"
Sounds good to me.
You need to convince me and mine why not having social spending is a good idea.
To dream the impossible dream,
to fight the unbeatable foe,
to bear with unbearable sorrow,
to run where the brave dare not go...
I believe in a relatively equal society, supported by institutions that limit extremes of wealth and poverty.
Limiting poverty is a noble cause. Limiting wealth is spiteful and stupid.
"You need to convince me and mine why not having social spending is a good idea."-liberalrob
Liberalrob, Harvard economist Robert Barro did some very careful growth regressions about ten years ago that demonstrated empirically that government spending is damging to the economy.
As he summarized his work:
I know you get testy though when I use economic jargon, so just forget about growth regressions if you like and look at the following Index of Economic Freedom. Surely you notice that there is a remarkable correlation between the degree of economic freedom and the degree of prosperity, from Hong Kong and Singapore at the top to Cuba and North Korea at the bottom.
The correlation is so strong, indeed, that one can hardly avoid inferring a causal connection. Extensive government interference in the economy seems to damage growth and lower income over time.
Thus, through heavy government expenditures, you could indeed ameliorate the condition of the poor in the short run. Over time, though, you will be damaging growth and throwing away the best hope the poor have to rise. You will create more poverty--not less. You might consider that compassionate, but to me (as well as to Robert Barro and Rob Lyman I think) it just seems myopic.
Liberalrob:
"I believe in a relatively equal society, supported by institutions that limit extremes of wealth and poverty."
What I hear is that if you are smart, hard working, and ambitions, we will put a limit on how far you can go. And, no matter how lazy, ignorant, and foolish you are we will limit how far you can fall.
I really don't think we should do anything for those who insist on being lazy, ingnorant, and foolish.
I can just imagine which Federal spending cuts you guys would advocate "bring[ing] down...as the economy recovers."
Farm bill would be a good start... would you fight that cut "tooth and nail", too?
You need to convince me and mine why not having social spending is a good idea.
I'll bet your television is black and white, too.
At any rate, this limitation upon total spending works for me, assuming it can be enforced practically: Any social spending that works to convince significant numbers of people that they can live well without a corresponding level of responsibility is necessarily destructive and harmful.
Would this be the same Robert Barro who wrote "There's a Lot to Like in Bush's Tax Plan," "Boy, We Really Need a Tax Cut," "Gore's 'Reckless and Offensive' Passion for the Environment," that Robert Barro? Sounds like my kind of guy, for sure.
Yes, especially when it comes from sources I don't trust...
...chart from the Heritage Foundation. Sigh. We have no basis for discussion here. I don't trust your sources.
And so we return to our basic philosophical difference: I see poor people and want to help them. You see poor people and want them to help themselves.
Everything flows from first principles. Those tend to be black and white.
I see poor people and want to help them. You see poor people and want them to help themselves
I think the point is that spending money on poor people is less helpful to them than getting them to help themselves.
The real problem with welfare spending generally isn't that it's a waste of money but that it's a waste of people. People who could be productive, useful, and self-respecting are instead become dependent and, often, actively destructive. The moral hazard problem is a problem not of destroying the fisc, but of destroying the morals which make productive lives possible by detaching enabling destructive behavior.
I really don't think we should do anything for those who insist on being lazy, ingnorant, and foolish.
Posted by Jmo | January 21, 2008 3:35 PM
Then, it looks like the FDIC, PBGC, and the rest of the alphabet-soup of the Executive branch should be chopped off, too...which, of course, would be a good thing..
spending is generally much more distortionary than tax cuts, because the government picks what the money is spent on.
This is "distortionary" in the same sense that the existence of government is distortionary. The government distorts the natural operations of the free market, in the laissez-faire extremist view, by building roads, providing fire departments and police, and paying for all children to attend school, even if they don't want to.
The US has a massive infrastructure backlog of hundreds of billions of dollars in road and bridge repairs that could use immediate attention. Unfortunately it can take a long time to get money flowing to such projects, but it would be a good idea, for example, to identify a constant list of top-priority infrastructure projects, do all the contractor reviews and so on, and hold them ready so that when an anti-recessionary fiscal stimulus is needed, an extra few tens of billions could quickly be pumped into the economy in a way that build long-term productivity.
The marginal propoensity to consume out of a temporary boost in income is low. - rwe
Correct. It follows that government spending, rather than tax rebates, is generally a more efficient tool for anti-recessionary stimulus, provided it can be mobilized quickly enough.
rwe and other libertarians here would like to use the stimulus package to promote their underlying ideological goal of smaller government. Such arguments have an ulterior purpose not related to the issue of anti-recessionary fiscal stimulus, and should be tuned out for the purposes of this argument.
"rwe and other libertarians here would like to use the stimulus package to promote their underlying ideological goal of smaller government. Such arguments have an ulterior purpose..."-brooksfoe
Yes, brooksfoe, my "ulterior purpose" is to do what's in the best interests of the country over time--not to focus myopically on the short run. Your proposed solution--a temporary boost to government expenditures--was tried in Japan and found wanting. The result was a massive increase in debt and sharply higher real interest rates.
It was also tried in this country in the 1970's. And then too it was found wanting.
Permanent tax reductions would work in two ways--by stimulating aggregate demand, and, more more importantly, by increasing the long run aggregate supply of goods and services.
You're an old-fashined Keynesian. That's fine. Keynes was a great man, but his ideas have largely been overturned by Hayek, Friedman and Lucas. The battle of ideas was fought, and Keynes was the loser.
I still like to read your posts though. You make interesting errors. And I won't even mention those SAT's...
And so we return to our basic philosophical difference: I see poor people and want to help them. You see poor people and want them to help themselves.
So do I, but it hardly means I have some open ended right to make other people help them. That you want the American people to do something is a rather poor rationale for forcing them to, especially past some minimum standard which we have long since past.
I'm hard pressed to see where a surge in consumer subsidies is going to have a particularly pronounced impact. Weakness in consumer spending is pretty much a secondary source of economic weakness, with the primary driver being a spooked credit market and imploding property values. Throw on top of that the inherently temporary nature of either the proposed tax or spending stimulus packages and you might as well take $50-100 billion, put it in a big pile, pour on a can of kerosene, and light a match accordingly.
And so we return to our basic philosophical difference: I see poor people and want to help them. You see poor people and want them to help themselves.
liberalrob,
How badly do you want to help the poor? I believe in another thread you said you made $56k last year. How much of your money do you think should be transferred to the poor? Also, how poor do you think someone needs to be to have a legitimate claim to your money?
Actually, Friedman would agree that neither government spending nor lower taxes (within normal limits) does very much in the long run to boost economic growth, which is a function of fundamentals: productivity, education, infrastructure, rule of law, etc. You can't really get a magic long-term growth boost just by taxing less or spending more.
What we're talking about here is short-term anti-recessionary spending. Pretty much everyone agrees a stimulus can blunt or avoid a recession and smooth out the business cycle. The question is: how to do it? Here's a good start:
http://www.cbpp.org/1-14-08bud.htm
Food stamps, for instance, are excellent sources of fiscal stimulus: they go to people who consume all their household income. Raise food stamp grants and within two weeks, you see almost all of it getting spent. Improved unemployment benefits work well for the same reason. Aid to state governments facing budget shortfalls works much like rainy-day funds to forestall recession-driven state budget cuts, which exacerbate the recession. And increases to infrastructure maintenance budgets, especially postponed repairs, could be effective.
You're not going to convince me that spending and taxes are too high, and I'm not going to convince you that spending is about right (though defense is too high) and taxes are too low. There's no point introducing these long-term arguments into this discussion. What we're talking about here is how to design short-term economic stimulus. You have various other ideological bugaboos in your head, as do I, but they're not relevant to this case.
The problem with increasing foodstamps as a stimulus is that people can only eat so much food - and judging by the fat women with fat kids I've seen when I passed by the welfare office, they're already getting plenty.
Or maybe Brooksfoe is secretly an evil conservative, with an evil plan to end welfare by overfeeding the clients until they keel over with heart attacks...
liberalrob,
How badly do you want to help the poor? I believe in another thread you said you made $56k last year. How much of your money do you think should be transferred to the poor? Also, how poor do you think someone needs to be to have a legitimate claim to your money?
Posted by SG | January 21, 2008 11:43 PM
SG,
that's the real beauty of peep like 'liberalrob', he'll never answer those Q's--even if he did, he wouldn't have the paper trail to back up his claims.
True virtue is voting to empower A to hold a gun to B's head to extort funds for C's benefit..as if
Friedman would agree that neither government spending nor lower taxes (within normal limits) does very much in the long run to boost economic growth, which is a function of fundamentals..."-brooksfoe
No. Milton Friedman did believe that cutting taxes and spending would improve growth and lead to a higher level of income. Look here:
It's clear then that Milton Friedman believed that tax cuts would eliminate distortions, improve incentives, and increase GDP over time. And he was right.
I'm always happy to discuss the great man and his work, and I hope I've helped to clear up any misunderstandings about either.
brooksfoe,
Well, count me as "no one" on this particular assumption in this particular case. Its not clear to me that the economy's problem lies particularly with consumer spending. A much bigger damper on economic activity seems to be the stalling of credit market activity on financial institution capital constraints. A short-term boost in subsidies to the consumer is not going to change that.
"Bush could also just refuse to spend any earmarks that are not a part of the appropriation legislation." - MarkD
This is not true. Or at least misleading depending on what you meant.
The President is required to obligate all of the money appropriated by the legislation. You can thank the Congressional Budget and Impoundment Control Act of 1974 for that. The earmarks that are found in the conference report simply detail how money appropriated in the actual legislation is intended to be spent by Congress.
The President may (and might) ignore the earmarks, but that simply means that the administration, not the Congress, will be deciding how to spend the money appropriated.
An example may help to clarify. The appropriations act may say that $1,000 shall be spent on transportation projects. The report to accompany that act may say that of that $1,000 - $100 should be spent to build the XYZ bridge.
Note that if the administration chooses to ignore the earmark, they are still required to spend $1,000 on transportation projects, but instead of building the XYZ bridge, they may decide to build the ABC bridge.
The concern with earmarks is not that they (directly) increase spending. It is that the temptation for lawmakers to support earmarks based on less than wholesome concerns is too great and leads to a culture of corruption.
It is probably true that some lawmakers support higher overall levels of spending in return for getting the earmarks they want. In that sense, earmarks probably lead to a somewhat higher level of spending than there would otherwise be.
I guess liberalrob wants a sort of financial Harrison Bergeron scenario, eh? How about implementing his other ideas, too. Can't have people being too rich, too smart, too good-looking, etc... can we? It wouldn't be fair.
Personally, when I see someone in need, I want to help them by showing them how to help themself. I don't want to go in and just fix their problem. I want to help them fix it. That's better for both of us. If I just fix their problem, then I may have to fix it again and again... and they become dependent on me fixing their problem. If I help them fix it, then they can perhaps fix it on their own, next time. Then I can maybe help someone else, instead... or they can help someone else.
If I'm going to use the government to force people to pay for programs that help people in need, I at least want the programs to attempt to get people to where they don't need help anymore rather than just provide them with a constant supply of support that makes them dependent on it.
I am not an economist so that probably accounts for the fact that I am unable to get my head around how a stimulus package stimulates the economy. Maybe someone can explain this to me.
The money for a stimulus package has to come from somewhere. I assume it either has to be printed, taken from someone, or borrowed from someone.
No one (thankfully) seems to be suggesting that we should print more money.
So the money has to either be taken from someone or borrowed (or both). It seems to me that this is just moving money around not "pumping new money in the economy" as some would put it.
The whole discussion of whether people spend or save a rebate seems pretty pointless to me also. Unless folks are putting the rebates in their mattresses - isn't the money staying in the economy whether they invest it or spend it?
Strong applicants for the roles of Shemp and Curly Joe. Well done. Yes, let's make it all about ME and not about MY PRINCIPLES.
How badly do I want to help the poor? Very badly. How much of my money should be transferred to help the poor? My fair share. How poor do I think someone needs to be to have a legitimate claim on my money? If they have a legitimate need that they cannot meet themselves due to their poverty. So you see, I do answer these questions. As far as your desire for a "paper trail," I could say anything. I could say I gave $25k last year to the March of Dimes. What would that prove? Your real agenda here, which is laughably transparent, is to call me a hypocrite because I advocate government assistance to the poor but give nothing myself. The flaw in your argument is that I consider the part of my taxes that goes to helping the poor just such giving. And I do give money to the Jaycees and Lions Club several times a year. FYI.
It's interesting- and revealing- that you place an acquired characteristic ("too rich") with two innate characteristics ("too smart, too good-looking") and laugh at me for wanting to somehow legislate away innate characteristics. Nice try.
I have no problem with that. But you and the 3+2 Stooges are arguing against any such government programs on a variety of bases (government inefficiency, massive bureaucracy, confiscatory taxes, etc.) which you throw against the wall haphazardly trying to see which one will stick. You give lip service to wanting to help the poor but then argue against any plan that would actually help them, instead endlessly promoting cutting taxes on the wealthy as the panacea which will cure all society's ills. I'm sorry, I don't agree with that, I don't agree with Milton Friedman, I don't agree with Robert Barro, and I don't agree with using pure economical analysis to determine social policy. People are not numbers.
liberalrob,
You don't seem to get it. The discussion becomes about you because you're the one who frames the discussion as "I'm a better person because I care more about the poor than you". Frankly, you haven't proven that assertion. Leaving aside that you haven't proven that more social spending would improve the condition of the poor (see: welfare reform), a willingness to spend someone else's money is simply not a sign of virtue.
I'm not asking how much you give to charity, I'm asking what you would think your fair tax rate is and at what point do you think someone else becomes entitled to the money you've earned. How much of your income do you feel you should part with to help the many (you individually earn more than the median household income) who are less fortunate than you? If your argument is that our tax rates are to low to support your desired level of social services, the tax rate that should apply to you is absolutely germane to the discussion.
For the most part, I'm actually in agreement with liberalrob here (I know, I know, try to contain your shock)
rwe suggests that the tax cuts should be permanent, followed by spending cuts. Well, great, which ones? I'm generally of the libertarian "government is too big" mindset myself, but spending cuts are clearly the hard part. It's easy to declare that other people need to stop spending your money, the tricky part is actually finding spending programs to be cut and convincing everyone to agree.
Even some of the most unpopular programs amongst this group of people (I think someone named farm subsidies?) have powerful constituencies defending them. That's a legitimate problem, and if someone here has a novel approach to attacking it, that would be interesting.
But instead, the usual approach is "well, let's just cut the taxes a lot now, and that'll force spending cuts later." We've heard that before, referred to as "starve the beast", and it doesn't seem to actually work - at least not in the short term.
We're like a guy with a credit card. Spending beyond our means, and saying to ourselves "man, I really need to spend less, but I DO need that espresso machine today. And those new clothes... and that trip next month... So charge that. But man, I should really try to cut my spending..." The hard part isn't SAYING "I should really cut my spending", the hard part is declining to buy things you want.
And the "gee rob, why don't you give all your money to charity" is a pretty crappy and petty personal attack, which doesn't really add value to the discussion.
liberalrob,
How badly do I want to help the poor? Very badly. How much of my money should be transferred to help the poor? My fair share.
How much is that? Give us a number.
How poor do I think someone needs to be to have a legitimate claim on my money? If they have a legitimate need that they cannot meet themselves due to their poverty.
I think something like a billion people live on less than $2/day. These people would certainly seem to fall into the category you describe above. How much of your money do you think they have a legitimate claim to?
And don't give me this "it's not about me" evasion. Your posts fairly reek with self-righteousness and barely-disguised contempt for "conservatives."
If we're to cut taxes temporarily, I join with those who favor expanding the investment tax credit. It immediately borrows spending from the future, which is exactly what you want. It draws upon "savings", and engages the mind of the market in picking the best targets. It creates/protects jobs.
On the spending side, revenue sharing for state and local governments will also create/protect jobs, minimizing the simple-minded across the board cuts that are all there is time for in a "crisis".
No.
As opposed to yours, which are paragons of civility and rational discourse.