Commenting on the stimulus bill that was passed in the House and a variation of it that is being debated in the Senate, President Obama said there were:
“very modest differences”
between the bills being debated and what Republicans want in a stimulus bill.
I find that hard to believe.
By any measure, the bill that came out of the House and the bill being debated in the Senate are not “modestly different” from even Obama’s outline for the bill!
You may remember that President Obama’s original outline for the bill was for a $750 billion bill with 40% of the bill targeted on tax cuts. What has been approved thus far is an $819 billion package with only 22% of “tax cuts.” Meanwhile, the Senate bill being debated, is $900 billion with 29% attributed to “tax cuts.”
The “tax cuts” in both the House and Senate bill are sleight of hand at best. The bulk of the “tax cuts” in the house bill are really one time tax credits and not tax cuts in any classical sense. It’s easy to see the difference. Where as true tax cuts change the amount of money a taxpayer has to spend on an ongoing basis, a tax credit is a one time event. The problem with credits is that they do not change spending habits on an ongoing basis. In fact, what was seen in last year’s rebate, is that a significant portion of the refund went to paying down loans or into savings and not into direct “stimulation” of the economy. The increase in “tax cuts” in the Senate version is mostly due to a one year patch to the AMT so that it doesn’t drag more taxpayers into it….a “patch” that has been routinely done so it’s really not a true reduction of any kind.
Modest does not describe anything about either of the bills being discussed. Not the size, the impact on the growth of government nor the differences between them or what Republicans ought to want. The only thing “modest” in this entire scenario is the logic of those who complained about the spending by Republicans but suddenly believe that spending is AOK now.
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.
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.
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.
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.
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.