Is it worth it to deficit spend (either through renewed or increased tax cuts or through renewed or increased government works projects) in order to address the nation's high unemployment figures, or should we be more concerned about the deficit despite 10% unemployment?
If it is worth it to deficit spend, which has more stimulating effect, government works projects or tax cuts?
7 comments:
Well, I'm not an economist, but I play one on teevee...
I read on an economics blog the answer to your second question. Though this is disputed by more ideological economists, the gist was that each dollar spent in economic stimulus generates $1.30-1.75 in increased GDP. Each dollar spent on tax cuts generates $1-1.25 in increased GDP. Your mileage may vary! I do think it's unquestionable that spending is more stimulative than tax cuts. (Though in this world apparently nothing is beyond dispute, with the GOP claiming that the stimulus actually hurt the economy). But whatever.
The classic economic theory is that yes, it is worth it to deficit spend, and to do so heavily, in times like these, in order to get the economy restarted. The US government, being a safe haven for cash, can still borrow money at incredibly cheap rates, and the resultant economic activity would more than repay the expense. This theory is heavily under attack by conservative economists, but it has been accepted for 80 years.
I am not an economist, so all I can do is parrot the opinions of my betters, but I am really concerned about a couple of things, based on left-ish economist bloggers I read:
1. The stimulus was way too small
2. The root cause of the collapse was not the instability in the financial markets (since resolved) but the massive overvaluation in US housing. This overvaluation has not yet been completely corrected and further loss of equity with increases in foreclosures may be expected.
3. The government seems to be unable to commit to further stimulus spending and worse, seems intent on implementing austerity measures which may create a contractionary economic climate.
Or to translate: this recession isn't over and is going to get much worse before it gets better.
Remember Japan's "Lost Decade?" It may well happen here.
I do think it's unquestionable that spending is more stimulative than tax cuts.
You did also say that "nothing is beyond dispute" so I guess this is the dispute on your unquestionable stake in the ground.
The idea that spending is always more stimulating than tax cuts is an awfully broad statement to make. In taxation scenarios of great enough percentage of personal wealth, it is plainly true that a population gets disincented to produce wealth. You can argue where that line is, but it seems silly to me to argue that spending is always more stimulative. I would also argue that measuring the impact of tax cuts s more subtle than measuring the impact of spending, so I question any study that puts dollar figures on such things.
When you say it's always more stimulating to spend, you ignore the fact that some societies are vastly more productive than others, and that it seems to correlate well, historically, to freer capital. Why would freer capital correlate to greater wealth on a macro scale if spending was always more stimulating than tax cuts? The truth is that it's more complicated than anyone who favors spending will admit.
"In taxation scenarios of great enough percentage of personal wealth, it is plainly true that a population gets disincented to produce wealth."
The top marginal tax rate under FDR was 90%. I suppose if you are in a place where working to make 10 million dollars will only earn you a million dollars you could see that. However, as for how plainly true it is, we aren't really talking about people making an hourly wage paying this rate.
But to focus on the issues American voters and advocates face today: I think the studies can be accepted if they are control for the general 20-40% marginal tax rate in a service economy like ours.
I think matt's points are fair -- that I was painting with a very broad brush and making some assumptions, like the current status where the top marginal rate is still very low. In cases of very high taxation, cuts will have a larger effect. On the other hand, when you are talking about direct stimulative effects of tax cuts, it's more effective to cut taxes on the middle and lower brackets -- the money returned to those taxpayers gets spent immediately and directly kicks into the economy, whereas upper class tax cuts are far less stimulative given that the rich are more likely to bank the refunds, reducing the immediate effect on the economy.
I also imagine there is a distinction between short-term effects and long-term effects, but as Matt said, it's heinously complicated. True, true.
This article has an interesting graph of the varying stimulative effects of various tax/spending measures. It was prepared by some analyst at Moody's, which seems credible to me on the face of it. (i.e. it's not by Cato or by MoveOn.)
Interesting to note that the Housing Tax Credit is a money-loser overall.
Gah. Forgot the link.
Jim, I'm not arguing about today or today's rate, but in general the question of how (or to what extent) a given policy affects a whole economy is unanswerable.
You can make general statements. Liam's comment about tax cuts being more immediately simulating for the poor than for the rich is true. But he acknowledged the truth that there are effects to investment that are hard (impossible?) to quantify.
It's just not possible to compare the strategies so directly, as frustrating as that is to say.
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