A Payroll Tax Holiday is the best damn stimulus for the country right now. We should enact it today.
In the last post, we laid out a few criteria for the stimulus we know is coming. A payroll tax holiday is the only stimulus that is structured properly to avoid a major recession or depression in our economy.
Here is Paul Krugman saying the stimulus next year isn't soon enough.
Here is an article about Harvard professors and Nobel prize winners who think that more than $1T will be necessary to stimulate the economy.
A few months ago there was a list floating around from congressional testimony that estimated the relative effectiveness of different stimulus packages.
Check it out in all of its glory:
Now take a look at this list closely. It is organized by style of stimulus. We want to focus on the ones that give back more than we spend, otherwise we are throwing money away. The bottom 4 are the biggest bang for the buck, and we should seriously consider each of these proposals. Clearly, each of these 4 best "bang for the buck" proposals do not fit at least one of our criteria.
Extending Unemployment benefits: It is not large enough stimulus. My estimate is that this would be in the $20B per year range. Therefore, it is too small by a factor of 50 or more. (Math: 4.5M unemployed * $298/wk * 13 weeks = $17B)
Temporary Increase in Food Stamps: It is not large enough stimulus. The entire program is only $40B a year. We could double it and it would not even be close to enough.
General Aid to State Governments: It would take too long to get to people. See Paul Krugman above on this topic. First, it has to pass the U.S. congress, then state govt have to decide, then the programs get their money, then it is spent. Expect this to finally make it to consumers sometime in late 2009, or early 2010. We would be in a depression by then.
Increased Infrastructure Spending: It would take too long to get to people. See above.
I am not saying that we should avoid these 4 stimulus methods. They are useful and should be pursued. I particularly like green infrastructure, but that is a topic for another conversation.
I am saying that the stimulus needs to be Huge and needs to happen Now. These methods will not, cannot be as effective as we need them to be. Either they are too small, or will be too late.
So what is left? We have two tax based stimulus that can be helpful.
- A lump sum payment
- Payroll Tax holiday
This is where the other criteria come in. Both the lump sum and the payroll tax holiday fulfill numbers 3 and 4.
- Gives vast majority of U.S. citizens cash money
- Let markets allocate the stimulus
However, numbers 5 and 6 are a little different.
- Restore Animal Spirits
- Promotes investment
We want this to restore the confidence necessary for businesses to begin to hire people again. This doesn't happen with a one time tax rebate, but it would happen if there were week after week of increased demand from consumers.
We want the stimulus to promote investment - which clearly infrastructure spending also does. A one time tax rebate doesn't really promote the hiring of new people on an extended basis. Probably it would be easier to hire a temp for a weekend or two. A one time tax rebate doesn't allow business people to make a decision to expand their business and invest in a new piece of machinery or hire full time staff. But, persistent extra spending by middle and low income people would promote that hiring. when you know business is going to be good for at least the next 6 months, you are more likely to make that risky decision.
Finally, criteria #7 is extremely important.
- Reduces economic reliance on speculation.
Only a payroll tax holiday would promote this criteria. For decades, we have had a get rich quick - spend it quicker mentality in the U.S. We have traders looking to make big bucks quickly and not build anything lasting for our economy. We want to promote consistency, and not one shot solutions to problems that end up making the problems worse. How better to get our selves away from this mentality but a week at a time? The persistent extra money in peoples pocket will make a huge difference, and additionally, it will begin to change the our industrial base to focus on mid and lower end consumer goods as a profit center rather than a commodity race to the bottom.
A payroll tax holiday is really the only way to get this economy moving again in a reasonable amount of time. The longer we wait, the more it is going to cost us.
I will get to exactly what this means by a payroll tax holiday in the next post. In a nutshell, it means nobody pays income, social security, or medicare taxes for 2009. For most people, it would be like a 15% pay raise for the next year at least.
Suspend payroll taxes today!