Why are tax cuts such a large part of the emerging Obama stimulus plan?
Monday, January 5, 2009 at 01:39PM In the public discussions of the stimulus plan, there seems to be near consensus on the Left that tax rebates (and especially rate cuts that don't affect household incomes immediately) are relatively ineffective at stimulating demand. Studies of the Bush tax rebates indicated that about half of the give-backs were saved or used to pay down debt instead of stimulating aggregate demand by being promptly spent. The leading "Democrat ideas" have been investment in infrastructure and green energy projects, subventions to State and local governments so they would not reducing spending, and of course extension of unemployment insurance. But over the weekend it was reported that the Obama stimulus plan will include a very large component that is just tax reductions, which is the only stimulus that Republicans approve. What's going on? Has Obama changed parties? Does he lack the nerve for a fight?
Tyler Cowan may have the answer here. The Obama team may not have been able to identify enough "shovel ready" projects to absorb all the infrastructure spending they may have wished. Rather than authorize money that would not be spent soon enough, or spend money on undeserving projects (like digging holes and filling them in), Obama has decided to bring forward the middle-class tax cut he promised and call it part of the stimulus plan. My assessment: If Obama proposes permanent tax cuts for the middle class only and front loads it with some kind of rebate, then he gets a twofer--stimulus and delivery on a campaign promise. If he proposes only temporary tax cuts/rebates, he's caving in to the GOP.
Skeptic
The Obama administration in waiting has released a paper by Christina Romer and Jared Bernstein with estimates of the jobs effects of the stimulus plan. These key findings are on page 2, with the second bullet being most relevant to the above post:
A package in the range that the President-Elect has discussed is expected to create between three and four million jobs by the end of 2010.
Tax cuts, especially temporary ones, and fiscal relief to the states are likely to create fewer jobs than direct increases in government purchases. However, because there is a limit on how much government investment can be carried out efficiently in a short timeframe, and because tax cuts and state relief can be implemented quickly, they are crucial elements of any package aimed at easing economic distress quickly.
Certain industries, such as construction and manufacturing, are likely to experience particularly strong job growth under a recovery package that includes an emphasis on infrastructure, energy, and school repair. But, the more general stimulative measures, such as a middle class tax cut and fiscal relief to the states, as well as the feedback effects of greater employment in key industries, mean that jobs are likely to be created in all sectors of the economy.
More than 90 percent of the jobs created are likely to be in the private sector. Many of the government jobs are likely to be professionals whose jobs are saved from state and local budget cuts by state fiscal relief.
A package is likely to create jobs paying a range of wages. It is also likely to move many workers from part-time to full-time work.
It's interesting that Bernstein, who made his reputation as a labor economist and is officially Chief Economic Advisor to the Vice President-elect, is a co-author with Romer, who is designated to be Chair of the Council of Economic Advisors.
Skeptic
Brad DeLong makes the case (mostly through a re-post from Howard Gleckman) that 2 of the 3 business tax reduction proposals leaked by the Obama team have been previously scorned as ineffective stimulus by some of Obama's economic advisors. Their apparent purpose is to buy GOP votes, but DeLong makes the point that the the proposed individual tax cuts would at least slow down rising income inequality, which is a traditional Democrat concern.
Reader Comments