by hilzoy
From the NYT:
“President-elect Barack Obama plans to include about $300 billion in tax cuts for workers and businesses in his economic recovery program, advisers said Sunday, as his team seeks to win over Congressional skeptics worried that he was too focused on government spending.
The legislation Mr. Obama is developing with Congressional Democrats will devote about 40 percent of the cost to tax cuts, including his centerpiece campaign promise to provide credits up to $500 for most workers, costing roughly $150 billion. The package will also include more than $100 billion in tax incentives for businesses to create jobs and invest in equipment or factories.”
It’s fine by me if Obama wants to include the middle-class tax cut he promised during the campaign. And the business tax cuts he has mentioned seem more intelligent than the standard cuts in corporate tax rates — they’re targeted at firms who invest, or who hire new workers.
That said, there are a lot of reasons not to focus on tax cuts. First, the money we are proposing to spend on stimulus is not free. We are proposing to spend a lot of it, and a lot of economists seem to think that $750 billion is on the low side. For both reasons, it’s important to get the greatest possible stimulus per dollar. And tax cuts won’t do it. Yves Smith:
“In very simple form, stimulus programs of various sorts are meant to compensate for a falloff in demand. You can have government spending (as in government does the consumption) or give the money somehow to consumers (in direct ways, such as tax cuts or vouchers of various sorts, like food stamps).
The problem with tax cuts is they may not be spent. And the degree to which they are saved means the stimulus was ineffective. In other words, reliance on tax cuts runs the risk that greater spending will be required to achieve the same result than via government spending.
That is not a theoretical concern. We saw it, big time, with last summer’s tax rebate. Gary Shllling did a detailed look at when the checks got in the hands of taxpayers versus changes in retail spending. He concluded that about 80% of the tax rebate was saved.
In graphic form:
Second, we have an enormous backlog of public spending. Our bridges are crumbling, our mass transit systems are generally pitiful, we badly need to upgrade our electric grid, etc., etc., etc. We need to do these things.
Third, people used to say that it was better to cut taxes than to spend more money, since tax cuts were easier to reverse. This might once have been true, and it’s probably still true for some politically connected programs, but it is absolutely not true for things like basic infrastructure spending. And we are going to need to be able to reverse course quickly. Once we have successfully avoided a full-scale depression, we are going to have to confront the next looming problem, which (imho) will be a run on the dollar. To do that, we are going to have to bring down the deficit. That will be hard in any case, but it will be a lot harder the sharper the increase in taxes it requires.
According to the WSJ, one reason for relying so heavily on tax cuts is that “it may make it easier to win over Republicans who have stressed that any initiative should rely more heavily on tax cuts rather than spending.” To which I can only say: screw them. Their economic philosophy got us into this mess; we should not let them force us to use ineffective means to get out of it.
If the Democrats can’t keep enough of their Senators in line to get this passed, and corral a couple of Republicans, then we’re in worse shape than I imagine. I’d really rather try to do it right before preemptively conceding to the Mitch McConnells of the world.
Excuse my naivety, but when have taxes been significantly increased (ie, in a non-revenue-neutral way) since Clinton’s 1993 tax hike helped usher in Newt Gingrich and his ilk? There seems to be such a stigma against tax increases that it’s construed as political suicide for anyone to advocate them, no matter how necessary they are. At some point, Obama’s going to need to get the cojones to sell a tax hike if we’re ever going to get back to fiscal sanity, but would that cost the Democrats a midterm election? In many ways, our financial problems seem to be a result of a deluded populace that is unwilling to pay the price for our profligacy.
“At some point, Obama’s going to need to get the cojones to sell a tax hike if we’re ever going to get back to fiscal sanity, but would that cost the Democrats a midterm election?”
That isn’t the relevant question, unless you believe you know the recession/depression will be over close enough to the mid-terms; more or less no economists seem to believe it’s a good idea to raise taxes to balance the budget during a depression. Not since Herbert Hoover did it, anyway.
“Once we have successfully avoided a full-scale depression, we are going to have to confront the next looming problem, which (imho) will be a run on the dollar”
I hope it goes in that order. Yves’ post right above it worries it won’t. Yves herself seems very concerned the dollar will collapse sooner than later…well I know I exchanged brief emails. Personally I am worried and think it’s increasingly likely that we’ll get an “inflationary depression” in which the dollar collapses and causes huge import price increases, even while there is domestic deflation and thus decrease in wages. I’m uh, well I’m not sure what we could do if that happens except maybe getting rid of our currency and starting over. It sounds outlandish I know, but unless the Fed literally starts helicopter drops I don’t see how wage inflation is going to take hold.
You’ve quoted Yves Smith in the Value at Risk post and this one. I thought i’d link to this one of his in which less stimulus is advocated.
http://www.nakedcapitalism.com/2009/01/willem-buiter-calls-for-less-us.html
oops. mikkel beat me to it.
The federal government runs the economy. It has ever since Japan racked up tremendous success in helping its industries compete against the rest of the world. With tax incentives, loans to industries,loans to people, spending plans, the number of people whose paycheck comes from the federal government,and the number of people whose healthcare is paid or supported by tax dollars, the federal government runs the economy whether we like it or not.
Stimulus checks are the current possible method to fuel the economy. After this comes a national lottery in which the proceeds are used to fund the stimulus checks.
Then the followers of Adam Smith will have tried it all, I think.
(It is expensive, isn’t it, to mind everyone else’s business?)
The political problem is that the GOP will take Obama’s proposals as a *baseline* from which to negotiate. Withal, they are going to be against *anything* he proposes, since they care more about their party than they do about the country – a supposedly ‘rational’ MO, BTW. I hope I’m wrong to fret, but the thing which always bothered me about Obama is bothering me now: there is no such thing as bipartisanship when only one side really wants it. I worry that team-Obama thinks bringing congress togeether and bringing the country together are the same thing.
jb — teamObama has demonstrated remarkable savvy so far. I doubt they are naive about congress.
I agree with this post from both political and the economic points of view.
I also agree with jonnybutter. There is no need for preemptive concessions.
The task is to increase demand. The way to do that is to demand, not to hope someone else demands, and certainly not to fall for supply-side nonsense.
I also don’t buy the “easier to raise taxes” argument. You can spend a lot of money in short-term ways – infrastructure, extended unemployment insurance, who knows what, that stop when the economy recovers. Raising taxes is harder. We have political party with nothing short of a fanatical devotion to the idea that taxes should never be raised ever, under any circumstances, but shouldalways be cut. That has contributed heavily to the kinds of dangers mikkel mentions.
Hilzoy, you’re talking past yourself. The tax cuts you’re listing as having a small effect on spending are not the tax cuts Obama is contemplating, which is “$100 billion in tax incentives for businesses to create jobs and invest in equipment or factories.” That is, you don’t get the tax cut unless you spend the money. Not only that, but the tax cuts are incentivizing the spending of private money, so they might have a great multiplier effect.
With close to a trillion dollars to spend, I don’t think infrastructure is going to get short-changed. There’s plenty of money to go around for everything this time around. But it’s important that these projects be shovel-ready, and there really isn’t enough projects like that for all the money we have to spend. So why not get some money into the private sector too? If we put money into infrastructure projects and the money doesn’t get spent for 4 or 5 years, then we could fall into a period of stagnation that could sink spoil Obama’s chances at reelection.
I think we rightly criticize conservatives for knee-jerk reactions… the solution to every economic problem seems to be capital gains tax cuts, for instance. But we shouldn’t do the same thing ourselves, and instinctually lash out at ANY tax cut, no matter how it’s constructed, and no matter how dire the situation is.
Depending on the details of implementation, federal income tax cuts often result in decreased income tax revenues for many states who tie their income tax to the federal tax in one way or another. In many states, money in the state budget is not truly fungible, so federal dollars given for infrastructure spending will not free up money to be used on other programs. The Obama administration and Congress need to be careful that they do not end up putting states in a worse bind than they are already in.
I continue to believe that the single most effective step the federal government could take to help the states would be to reimburse Medicaid at a higher percentage than they do currently (up to 100%, making it a purely federal program). This could be implemented immediately, and would in all cases that I have knowledge of, free up state general fund moneys.
Let us embrace the conservative mantra that everything can be solved with tax cuts!
Your failing schools? Tax cuts!
Your job losses? Tax cuts!
Your rising health care costs? Cuts to capital gains taxes!
The fact your roads have more holes than can fill the Albert Hall? Tax cuts!
That foreclosure on your house, and the credit company seizing your Hummer? Tax cuts!
War and rumors of war? Tax cuts!
The New York Yankees payroll? You better believe the Steinbrenners are getting a tax cut for that!
Isn’t it a bit too early to be reading the signals yet? We don’t know whether this is a clueless Obama seduced by the Court of Summers, or a classic display of the fine art of tricking the enemy into throwing his head at you.
Addressing the latter, note that merely saying ‘tax cuts’ doesn’t capture the full range of Republican perfidy. It’s more like ‘tax cuts for the wealthy’. I’d also like to see the list of spending cuts; as an example of la-la fantasy land, imagine $100 billion worth of tax cuts on the middle class, and $200 billion worth of spending cuts to the military.
But that’s all by the by; what we’re seeing here is just the first stages of a PR war.
Wagster,
But we shouldn’t do the same thing ourselves, and instinctually lash out at ANY tax cut, no matter how it’s constructed, and no matter how dire the situation is.
True. But when the objective of the cuts seems to be simply to mollify Republicans I get worried. Plus, I’m dubious about the stimulative value of business tax cuts. Business doesn’t expand until there is demand for its products. No demand –> no new factories or hiring. Tax refunds for past losses just go in the bank, or the owners’ pockets.
Sure, it’s worth waiting to see what the actual proposals are, but nervousness is justified.
maybe we should wait to see the actual proposal before deciding what Obama’s motivations were… ?
cleek,
Fair enough, though news reports do suggest that getting significant Republican support is part of the idea.
Mr. Obama’s team has spoken of wanting to attract significant Republican support, not simply picking up votes from a Republican moderate or two.
I wonder if Obama is gearing up to outflank the GOP machine, like he preempted the inevitable “SOCIALIST” nonsense with a tax cut proposal for the lower 90%. The GOP seems so stupid and mechanical in how they respond to everything, they are practically begging for someone to misdirect them straight off a cliff.
teamObama has demonstrated remarkable savvy so far. I doubt they are naive about congress.
farmgirl: I realize I’m hand-wringing here, since we don’t know what the plan is, really; and I have great respect for team obama’s politico-tactical prowess. But what I fear is that they actually believe in ‘bipartisanship’ – that Obama himself believes in it, as a *value*. I don’t doubt his sincerity – in fact, his (presumed) sincerity is what worries me.
It’s often smart, if you’re going to win anyway, to give your adversary a way to save face, or even a bit more than that. But you can only profess ‘malice toward none and charity for all’ if you win, ie get what you want. ‘Post partisanship’ is the luxury of the overwhelmingly powerful, and even then is wisely used only at the margins.
I’d like to give Obama the benefit of the doubt, but I just can’t imagine what the ‘trick’ might be. A trial balloon? Do you need one of those to predict how the GOP will react? Or the Blue Dogs?
Obama pointedly talked about bi-partisanship in his latest youtube chat. I think he might really believe it it. If so (beyond the margins, I mean), god help us.
The advantage of tax cuts is that they go into effect very quickly. Allocating $800b in public spending and having it all take effect within several months is an extraordinarily tall order. So, even though the multiplier is (probably) lower for a tax cut, at least it’s putting relief into the system and doing it fast. Personally I think stimulus should focus on tax cuts, expanded unemployment benefits, and direct aid to states’ budgets. Public works should be in there, but it shouldn’t be the central pillar of the package.
handwringing in more detail:
I think that some exceptionally fine people, like BO, at some deep level, don’t understand people who can’t be persuaded, people who they can’t kill with kindness, as it were. These fine, and usually accomplished, people have the rare gift of making persuasion work a surprisingly large amount of the time – much more than average. So I think it shocks them, wrong-foots them, when it finally *doesn’t* work.
Take the Rev. Wright kerfuffle-haha: Obama reacted brilliantly at first, by being an actual statesman. But remember his presser after Wright subsequently gave *his* speech at the press club? Obama was stunned.
During the campaign, Republicans and HRC suggested that Obama was naive and not tough enough, etc. to deal with foreign policy. I don’t have any worries about that vis a vis Obama – none. What worries me is what they really meant…
Partisan Republicans, as many here will have noticed (!), tend to project their bad qualities onto their opponents – lack of patriotism, greed, lying, corruption, etc. Another part of this projection is knowing in their heart of hearts that it’s *they* who are the problem: HRC and the GOP were actually chiding Obama to the effect that he isn’t tough enough to stand up to *them* (this hand was actually tipped – hilariously – on Fox at one point, when it was asked: ‘how is Obama going to face up to terrorists if he wouldn’t come on Fox News Network?’. Remember that? Comedy gold.).
What worries me is the learning curve. The economy is pretty fkd and time matters. I don’t want to see a stunned look on the president’s face in 6 months.
We shall see.
“But what I fear is that they actually believe in ‘bipartisanship’ – that Obama himself believes in it, as a *value*. I don’t doubt his sincerity – in fact, his (presumed) sincerity is what worries me.”
Obama was a State Senator from 1997–2004: where in his actual record is there any basis for this concern about him being rolled? It’s not as if he’s arriving as a blank slate. For some reason, it seems as if a lot of folks keep treating him that way, and I don’t get that.
“I think that some exceptionally fine people, like BO, at some deep level, don’t understand people who can’t be persuaded, people who they can’t kill with kindness, as it were.”
I’m guessing you haven’t read Dreams from My Father or any of the many long pieces about his years as a community organizer, because I don’t see how anyone remotely familiar with this part of his career could possibly think this statement is true.
The entire reason he quit as an organizer, to get into politics, is that he recognized that people couldn’t just be “persuaded,” even by small or moderate numbers of powerless people. This is not an obscure thing in Obama’s career.
Obama was a State Senator from 1997–2004: where in his actual record is there any basis for this concern about him being rolled?
I didn’t mean to say that I thought he would be ‘rolled’. I meant to say that I was worried that he actually believes in bi-partisanship as some sort of core value – and there is lots and lots of evidence that he does, from both his career in the IL Senate and his campaign for pres. I’m not worried that he will be rolled, exactly – more like that he will ‘roll himself’, so to speak – shoot too low, be too cautious.
I also didn’t mean to suggest that I agree with the GOP charges of naivete and lack of ‘toughness’, even vis a vis themselves. But those charges might – as such charges often do – point to an actual soft spot, a vulnerability. Just sayin’. I’ve watched Obama for a while, and I like him. I just think this post-partisanship-as-a-value crap is just that – crap.
The phishing spammers are already on it:
“I just think this post-partisanship-as-a-value crap is just that – crap.”
I think that, as much as anything, it’s a tactic/strategy, as much as an eventual goal to get rid of this current crop of Republicans, and back to more sane ones, if possible, but we’ll see. I’m sure Obama will disappoint me at times, of course. I’m just not too willing to get riled in advance and anticipation.
I’m not happy with the Dennis Blair DNI nomination, as I’ve just posted again on this thread.
I think that, as much as anything, it’s a tactic/strategy, as much as an eventual goal to get rid of this current crop of Republicans, and back to more sane ones, if possible…
Yeah, but what’s the tactic or strategy? I can’t figure it. It’s almost as if the new Team has adapted the real (and only) Bush Doctrine: when they zig, you zag; always keep em guessing. Presidents always learn from previous presidents, whatever their Parties. So maybe it is some kind of head fake-deal.
Some CW Josh Marshall chose to publish (sorry no link, but you all read TPM anyway, so..)
If he is able to [divide the GOP].. at the get-go, he’ll log-roll them for months. It is going to be really hard for them to oppose any measure designed to make America’s economy get back on track.
I don’t want the GOP log-rolled for months. It’s been too many months already.
Yes. Moody’s has been right about so many things these days.
It’s well worth reading Krugman’s comments on the stimulus, here and here.
Short story: he thinks it is inadequate, and fears that, although unemployment will be lower than it would be otherwise, it will still be high enough in 2010 for the plan to be characterized as a failure.