Bruce Bartlett offers an excellent overview of the stimulus debate in Forbes, and in my opinion draws the right policy conclusion:
I think the critics of an activist fiscal policy are forgetting the essential role of monetary policy as it relates to fiscal policy. As Keynes was very clear about, the whole point of fiscal stimulus is to mobilize monetary policy and inject liquidity into the economy. This is necessary when nominal interest rates get very low, as they are now, because Fed policy becomes impotent. Keynes called this a liquidity trap, and I think there is strong evidence that we are in one right now.
The problem is that fiscal stimulus needs to be injected right now to counter the liquidity trap. If that were the case, I think we might well get a very high multiplier effect this year. But if much of the stimulus doesn’t come online until next year, when we are likely to be past the worst of the slowdown, then crowding out will greatly diminish the effectiveness of the stimulus, just as the critics argue. According to the Congressional Budget Office, only a fraction of proposed infrastructure spending can be spent before October of next year; the bulk would come long after.
Thus the argument really boils down to a question of timing. In the short run, the case for stimulus is overwhelming. But in the longer run, we can’t enrich ourselves by borrowing and printing money. That just causes inflation.
The trick is to front-load the stimulus as much as possible while putting in place policies that will tighten both fiscal and monetary policy next year. As terrible as our economic crisis is right now, we don’t want to repeat the errors of the past and set off a new round of stagflation.
For this reason, I think there is a better case for stimulating the economy through tax policy than has been made. Congress can change incentives instantly by, for example, saying that new investments in machinery and equipment made after today would qualify for a 10% Investment Tax Credit, and this measure would be in effect only for investments largely completed this year. Businesses will start placing orders tomorrow. By contrast, it will take many months before spending on public works begins to flow through the economy, and it is very hard to stop it when the economy turns around.
Stimulus based on private investment also has the added virtue of establishing a foundation for future growth, whereas consumption spending does not. As economist Hal Varian of the University of California at Berkeley recently put it, “Private investment is what makes possible future increases in production and consumption. Investment tax credits or other subsidies for private sector investment are not as politically appealing as tax cuts for consumers or increases in government expenditure. But if private investment doesn’t increase, where will the extra consumption come from in the future?”
Some may reply that infrastructure stimulus spending does provide a foundation for future growth. But the point is that the timing for infrastructure spending is wrong to work as stimulus. I’m eager to have a debate over whether certain putative public goods are public goods, over whether they are underfunded, over what tax-funded infrastructure is most needed and most conducive to future growth. But this is actually a pretty irresponsible time to have this debate. A government with superpowers that could with laser precision identify immediately those places where economic resources are underutilized and somehow approve a bunch of projects that bring those (and only those) resources online and get those projects started now without undue corruption, waste, etc. might have a chance to stimulate with an infrastructure surge, but that’s not a possible government, so it’s bad policy. If there are stimulus options that can be well-timed, that do not all-but-guarantee a decade of clusterfuck contracting scandals, that can be easily reversed, and that encourage the development of the real economy, then what is the possible objection?
Is that the CBO report that doesn't really exist? The one that didn't doa complete assessment?
OK well it is that one. Which is slightly suspect. But I guess it still stands, at least as to that small part.
I suppose my objection would be tax cuts would just shift the “undue corruption, waste, etc.” from the government to the private sector….have we not learned anything from the last 20 years? Right now I trust the government with money far more than anything, ANYTHING, handling money on their own.
CBO's views on the payout rate from infrastructure spending long predates this administration. Check the testimony of various CBO officials on its web site. They have repeatedly said that only about 25% of money is spent the first year after being made available for spending. That means after the proposal has been made, after the authorization has passed Congress, after the appropriation has been made and the fiscal year has begun, and after the relevant federal agency has certified that the project is in fact ready to begin. Given that most public works projects take more than a year to complete, why is it any surprise that only a fourth of the money is spent the first year?
Why would the Investment Tax Credit be better at identifying where “economic resources are underutilized” than infrastructure programs? We know for sure that infrastructure spending will have to increase in the future. Existing infrastructure requires upkeep, and new infrastructure projects will be required to adapt to new technologies, population patterns, etc. So using infrastructure as stimulus is just about shifting the timing of spending that's going to happen anyway.
An investment tax credit would induce investment spending that may or may not have occurred in the absence of the credit crisis. There's no way of knowing whether the tax credit is encouraging investments that would make economic sense if financing was available, but that the credit crisis has made uneconomical, or whether the tax credit is encouraging investments that wouldn't make economic sense even if financing was available.
I don't buy the generic CBO analysis. Every city has a shitload of repair projects ready to go. Every city needs new buses, upgraded steets, sewer line repairs, etc, etc. And what I like about the infrastructure investment is that it links much more closely to job growth. The last Republican “recovery” had pathetic job growth mainly because stimulus consisted of tax cuts. Bush's record was terrible on jobs and I find jobs to be the most compelling stat to look at despite our normal infatuation with GDP.
Also, Obama's team seems to identify 75% of the stimulus being spent within the first 18 months. When an actual report gets released from the CBO that's what it will say. Too bad the Republicans blocked a stimulus package back in September/October. Some of these infrastructure projects would be coming online right now.
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“In 1980, Ronald Reagan promised that, if elected, he would cut taxes, raise military spending AND balance the budget—all at the same time. His opponent, George H.W. Bush called it “voodoo economics”. But Reagan won the election and kept his promise. He cut the marginal tax rate on the highest income earners from 75% to 38%. What happened?
In 1982, the first full year for Reagan’s policies, the economy shrank by 2%, the worst performance since the Great Depression. Investment — the magic transmission belt through which all other Supply Side benefits were supposed to flow — actually declined as a percent of GDP over the 1980s. Worse, Reagan’s Supply Side policies created the biggest budget deficits in history. The numbers tell the story.
Jimmy Carter’s last budget produced a deficit of $77 billion. At the time, it seemed huge. But Reagan’s first budget swelled the deficit to $128 billion. By the next year, 1983, it had exploded to $208 billion and was creating severe problems for the economy. By 1992, at the end of the “Reagan Revolution,” (under Reagan’s Vice President and successor, Bush, Sr.) the deficit was approaching $300 billion a year.
Annual deficits, of course, accumulate to the national debt. In 1980, the national debt amounted to less than $1 trillion. By the end of 1992, it had reached $4.35 trillion. In other words, the debt, which had taken over 200 years to reach $1 trillion, quadrupled in the 12 years of Supply Side Economics. A more complete, definitive repudiation of Supply Side’s claims could not be imagined. What went wrong?
According to Supply Side “theory,” tax cuts should go to the wealthy for only they can afford to use the extra income to invest in the economy — to increase its capacity to “supply” goods. But there is nothing to make sure they actually invest, especially in the U.S. economy. ” by Robert Freeman
If you give a dollar to a low income family, they will spend the dollar at a US supermarket; if you give the dollar to a rich person, they will invest it, some domestic but a lot of it in other countries. They may short the dollar, treasuries, or put it in a Swiss account or gold.
Save the tax cut for the rich BS for someone who didn't study economics, ok?
“In 1980, Ronald Reagan promised that, if elected, he would cut taxes, raise military spending AND balance the budget—all at the same time. His opponent, George H.W. Bush called it “voodoo economics”. But Reagan won the election and kept his promise. He cut the marginal tax rate on the highest income earners from 75% to 38%. What happened?
In 1982, the first full year for Reagan’s policies, the economy shrank by 2%, the worst performance since the Great Depression. Investment — the magic transmission belt through which all other Supply Side benefits were supposed to flow — actually declined as a percent of GDP over the 1980s. Worse, Reagan’s Supply Side policies created the biggest budget deficits in history. The numbers tell the story.
Jimmy Carter’s last budget produced a deficit of $77 billion. At the time, it seemed huge. But Reagan’s first budget swelled the deficit to $128 billion. By the next year, 1983, it had exploded to $208 billion and was creating severe problems for the economy. By 1992, at the end of the “Reagan Revolution,” (under Reagan’s Vice President and successor, Bush, Sr.) the deficit was approaching $300 billion a year.
Annual deficits, of course, accumulate to the national debt. In 1980, the national debt amounted to less than $1 trillion. By the end of 1992, it had reached $4.35 trillion. In other words, the debt, which had taken over 200 years to reach $1 trillion, quadrupled in the 12 years of Supply Side Economics. A more complete, definitive repudiation of Supply Side’s claims could not be imagined. What went wrong?
According to Supply Side “theory,” tax cuts should go to the wealthy for only they can afford to use the extra income to invest in the economy — to increase its capacity to “supply” goods. But there is nothing to make sure they actually invest, especially in the U.S. economy. ” by Robert Freeman
If you give a dollar to a low income family, they will spend the dollar at a US supermarket; if you give the dollar to a rich person, they will invest it, some domestic but a lot of it in other countries. They may short the dollar, treasuries, or put it in a Swiss account or gold.
Save the tax cut for the rich BS for someone who didn't study economics, ok?