The Stimulus Plan
Now that the New Year has arrived all eyes are focused on the stimulus plan being assembled by the Obama team. First reports indicate that as much as $300 billion wll be in the form of tax cuts. That’s a bad idea. Here’s Krugman in today’s New York Times explaining why: Fighting Off Depression
The central issue is that tax cuts in the current environment have virtually no chance of addressing our central problem which is the huge drop in final demand. Instead tax cuts are most likely going to go straight into savings, either as direct savings or as reductions of debt.
As long as the economy wallows in its current liquidity trap with final demand languishing well below growth levels the focus of policy has to be to lift demand. The classic method to accomplish that is through government spending in order to replace the drop in private spending. Examples are well known: public works projects like road building; bridge building; and so on. These projects generate jobs and leave a lasting social benefit.
Cutting taxes has been shown to be a highly inefficient way of providing stimulus because so much of the money applied to the cut fails to show up as demand [via consumption spending]. The 2008 tax cuts are a good recent example. Also: in the past studies have shown that as little as a half, and sometimes less, of the dollars spent on a tax cut end up being spent. The rest goes to savings.
Given the enormity of the task ahead wasting large sums of money in tax cuts is not effective policy.
At the same time, and as Krugman points out, there are not enough projects ready to fund, so some tax cut could be justified in the hope it would augment the public works efforts.
The key to remember is that tax cuts are supplemental, not central, to the stimulus package.
Which is why the rumored amount of $300 billion is so eye catching: it is almost 40% of the total stimulus package. And that’s way too much.
We must also remember that the package is still being put together so any leaked amounts are highly speculative. It seems as though tax cuts are being included in order to buy Republican support for the plan. Apparently some Republicans still cling to the belief that private efforts are sufficient to get us rolling again and that huge public works programs are therefore unnecessary.
Frankly these Republicans are playing politics with the country’s economy. They are flat out wrong. Our situation has become extreme. We need to get a stimulus acting quickly in order to avoid a slump into a Depression. Obstructing the Obama plan for partisan reasons is an exceedingly dangerous course of action.
Plus the laissez fairs approach favored by the Reagan Republicans who are the core of the obstructionists has just been exposed as horribly flawed policy. The deconstruction of regulation and the institution of free wheeling laissez fair economics is what got us into this mess. Only the blindly partisan don’t see that.
But apparently the obstructionists are strong enough to skew the proposed package towards too much tax cutting. That does not bode well for the country.
