Comments on: Modest?

By: scott

scott — Wed, 04 Feb 2009 15:11:31 +0000

It is also my understanding that permanent tax cuts encourage spending more than one-time giveaways. But I still believe that government spending is the surest and most efficient way to translate a dollar into a dollar’s worth of demand. Tax cuts–permanent or one-time–can be spent or not. And as far as infrastructure demand coming “too late,” I don’t buy it. Certainly not when compared with tax cuts.

By: Shoebox

Shoebox — Tue, 03 Feb 2009 17:27:03 +0000

In reply to scott.

I don’t think we’re hearing different issue except to the point that there are folks who want to obfuscate the issue to fit the current scenario. Here is Romer’s own article where she finds that tax cuts are dramatically different than “stimulus” under all scenarios…The number she comes up with is 3X. She also wrote this paper http://www.nber.org/papers/w4765 saying that “stimulus” and “infrastructure” programs always come too late to impact down turn. What’s interesting is that this is the same woman who penned this missive http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf to support the stimulus plan. In it she attempts to show that “stimulus” has higher return than “tax cuts.” Seems pretty inconsistent right? What has explained the “inconsistency” is the difference between permanent tax cuts and the “tax cuts” which are in the plan which are mostly one time credits. The prior (permanent) changes the disposable income that people have and like an ongoing income raise, they use it towards their monthly budget. The latter, one time, does not change behavior and because it is not recurring people view it as a windfall and in challenging economic times will save it or pour it into debt buy down…not bad things in and of themselves but not what helps pull an economy that has turned down because of a lack of consumer spending. The two types of what are called “tax cuts” (but only 1 is) are vastly different in their impact on the economy. Unfortunately, people are attempting to disprove permanent tax cuts but are using the details of one time give backs…it’s apples and oranges.

By: scott

scott — Tue, 03 Feb 2009 17:03:54 +0000

We are hearing different information, you and I. As I said, what I am reading is that because tax cuts can be saved or otherwise not spent on goods and services, you actually get less than $1 worth of bang for every actual dollar cut. Government spending, on the other hand, is of course spending on goods and services and thus you get 100% of it translated into demand to drive up employment and production.

And I think that’s the whole Keynes debate, isn’t it? Ordinarily if demand falls, prices will drop and everything corrects itself–until it doesn’t. Sometimes all the supply-side changes you can muster don’t stimulate people to buy. But what do you do when the tailspin is too far gone and things don’t correct themselves. You stimulate demand. And the most efficient way to do that is to spend it directly instead of giving it in tax breaks which may or may not be spent.

By: Shoebox

Shoebox — Tue, 03 Feb 2009 16:03:37 +0000

In reply to scott. Scott, you're right. Tax cuts don't translate into a dollar for dollar stimulus. According to Christina Romer, each dollar of tax cuts actually translates into $3 of GDP growth (stimulus). Government spending, no matter how well managed, translates to something just above $1.

By: scott

scott — Tue, 03 Feb 2009 15:16:21 +0000

Tax cuts don’t translate into demand on a dollar for dollar ratio. Some people will choose to not spend part of their cut/refund. They say that only a third of the just previous rebate went directly into the purchasing of goods and services. Not so with government spending. By definition, every dollar is actually spent, creating demand, creating jobs. It is for this reason that I believe the bulk of the stimulus bill should be made in the area of government spending and not tax cuts.