Via The Left Anchor...
Only a few weeks ago, I was excited at the opportunity the economic stimulus package presented to the Democrats. While I think we'd all rather the economy was doing better than it is, there is also no denying that situations such as this are where radical changes can be achieved. And yet, as we approach inauguration day, the rumors swirling about the stimulus package indicate a timid, too-little approach centered largely around tax cuts. Sen. Tom Harkin emerged from stimulus talks yesterday with many of the same concerns:
Read more below the fold...
"There's only one thing we've got to do in this stimulus, and that's create jobs," Harkin told me. "I'm a little concerned by the way Mr. Summers and others are going on this ... it still looks a little more to me like trickle-down."
Likening Barack Obama's economic recovery plan to the failed supply-side excesses of the Reagan and Bush years is a bit of a Cassandra moment. But Harkin didn't back down. "What I'm hearing from Mr. Summers is that they've got a different approach -- tax breaks, and this and that," he said. Harkin warned that, much like the outcome of George Bush's $600 stimulus package last year, recipients of quick tax cuts "are going to be salting it away, not spending it."
When I asked if he felt his concerns were heard during the meeting, he looked to the floor and slowly shook his head. It was almost forlorn.
The sad truth is that economics was perhaps the single greatest question mark in Barack Obama's political philosophy. He's always had concrete ideas on foreign policy, he's drafted a respectable health care reform outline, but beyond his call for middle class tax cuts during the campaign, his views on how best to handle this economic collapse have been murky. That he was far more willing than John McCain to use government spending to deal with our current woes was obvious, and it was one of the many reasons he was the better candidate, and why he will make the better president. But now we've entered the "how" phase of economic stimulus. How will we spend government resources, and how much are we willing to spend? According to Paul Krugman, the answers so far seem to be: on tax cuts, and not enough:
Bit by bit we’re getting information on the Obama stimulus plan, enough to start making back-of-the-envelope estimates of impact. The bottom line is this: we’re probably looking at a plan that will shave less than 2 percentage points off the average unemployment rate for the next two years, and possibly quite a lot less. This raises real concerns about whether the incoming administration is low-balling its plans in an attempt to get bipartisan consensus.
The folks over at the Tax Policy Center did an analysis on the Bush tax rebates of last year, and then looked at how those figures would apply to Obama's proposals:
The research on the last three rebates suggests that people spent between one-third and one-half of the money within nine months of the time it got into their pockets. If Obama pumped $150 billion into these tax cuts and 40 percent, or $60 billion, got spent, the impact on the U.S.’s $14 trillion economy would be real, though modest.
They also note the glaring irrationality in the idea that tax cuts will create jobs:
Refundable tax credits for hiring new workers promise to be an administrative nightmare and won't create many new jobs. It is tough to see how a company that is seeing its sales slaughtered in today’s recession is going to hire just because it gets a few thousand dollars per new worker from the government. Profitable firms would merely take the credit for bringing on workers they were already planning on hiring.
I can’t begin to imagine how the variation on this idea--credits for not laying someone off--would work. My head throbs at the concept of the IRS trying to administer a rebate based on intentions. Worse, these breaks would never work unless they are refundable and, to be honest, giving such credits to failing business makes my skin crawl. In reality, it would become yet one more bailout—only this time taxpayers wouldn't even get stock for their trouble.
Exactly. This is the part of so-called trickle down economics I've never understood. Companies hire as many people as they need to fulfill the demand for their products or services. They're not going to hire fewer people than they need to effectively meet that demand simply because the government is rewarding them for creating new jobs, and they're not going to hire more people than demand warrants. Thusly, the clearest and simplest way to create new jobs is to stimulate demand, which is why rebates or tax cuts should be aimed at those who are likely to spend the majority of the money they receive. That's why food stamps and unemployment benefits are far more effective at pumping money into the economy than tax cuts for corporations and the wealthy. In fact, a study of 65 developed nations conducted by the World Bank -- hardly a bastion of liberal thought -- concluded what was already intuitively obvious:
Trickle-down theory also predicts a positive correlation between inequality and economic growth, the idea being that income disparities strengthen motivation to get ahead. Yet when researchers track the data within individual countries over time, they find a negative correlation. In the decades immediately after World War II, for example, income inequality was low by historical standards, yet growth rates in most industrial countries were extremely high. In contrast, growth rates have been only about half as large in the years since 1973, a period in which inequality has been steadily rising.
The same pattern has been observed in cross-national data. For example, using data from the World Bank and the Organization for Economic Co-operation and Development for a sample of 65 industrial nations, the economists Alberto Alesina and Dani Rodrick found lower growth rates in countries where higher shares of national income went to the top 5 percent and the top 20 percent of earners. In contrast, larger shares for poor and middle-income groups were associated with higher growth rates. Again and again, the observed pattern is the opposite of the one predicted by trickle-down theory.
No shit. Put it in the hands of people who don't have the luxury of saving it, and more money gets pumped into the economy, helping everyone. Put it in the hands of those who can simply sock it away, and only the wealthy benefit. But we can even take that a step further. The government is the ultimate spender. The government effectively has an unlimited credit-card. They can, and should take up the slack left by decreased consumer spending during times of recession. The deficits incurred by the government during the Second World War amounted to well more than 20% of the annual GDP (peaking at 30% in 1943). It was only that kind of spending that finally pulled us out of the Great Depression. And yet, the stimulus proposals being passed around now are closer to 3% of the GDP (not counting the 8.3% deficit already projected by the CBO), and even then, much of that spending is being used up by ineffective tax cuts. So, where should the money be going? Look no further than this chart which details the multiplier effect of various methods of government spending as derived from Congressional testimony of Mark Zandi:
And there you have it. Direct government spending in the form of infrastructure building, federal aid to the states, extended unemployment and food stamp benefits, and tax rebates. Those are the best methods for pumping money back into the economy, all of which call for the expansion of a progressive agenda. Now we just need Obama to remember it, and to have the courage to pursue it. Interestingly, it's the conservative agenda -- tax cuts for the wealthy and corporations, and reducing capital gains taxes -- that has the least effect. We've got the right people in charge; the question is can they do the right thing?
UPDATE: The New Republic offers its own thoughts on the stimulus plan.