Alan S. Blinder, a leading economist and former Federal Reserve Board vice chairman, wants to end the Bush tax cuts for the wealthy and use the huge budget savings to help fund public programs to create jobs, strengthen the safety net and stimulate the economy.
On a conference call with reporters Wednesday, Blinder said the economy is currently weak enough to require additional fiscal and monetary stimulus. He urged ending the Bush tax cuts for individuals making more than $200,000 and couples making more than $250,000 a year -- and directing the first two years of new revenues to programs like unemployment insurance, food stamps and fiscal aid to states. Blinder also advocated a WPA-style effort to reduce unemployment and spur private sector hiring.
I asked Professor Blinder if he thought the private sector needs a public jobs stimulus. "Absolutely," he replied, saying he favors creating a temporary "WPA-type public jobs program," one which he said would also "kick start the private sector hiring process."
The 2001 and 2003 Bush tax cuts, which were passed under reconciliation by Republicans so they only needed 51 votes in the Senate, benefited wealthier Americans the most. Those tax cuts for the wealthy had little stimulative effect on the economy, turned federal budget surpluses into deficits and exacerbated the growing income inequality between the top 2 percent and everybody else.
All the Bush tax cuts are now set to expire next year. While there is widespread support for extending those cuts directed at helping lower-income and middle-class Americans, the debate is on over whether to end or extend the tax cuts for those at the top of the income scale.
Blinder, an economics professor at Princeton, penned a recent Op-Ed on the subject in the Wall Street Journal.
Apparently unbothered by the consistency hobgoblin, some of the Republican deficit hawks also want to make the 2001-2003 Bush tax cuts permanent, rather than letting them expire on schedule at the end of this year. Yet their major argument is classic Keynesian thinking: Letting tax cuts expire is tantamount to raising taxes—which is the opposite of what you want to do when the economy is weak. A few days ago, Sen. Jon Kyl (R., Ariz.) even went so far as to declare it OK to raise the deficit to finance tax cuts, but not to pay unemployment benefits.
Blinder's preference?
Let the upper-income tax cuts expire on schedule at year end. That would save the government an estimated $75 billion over the next two years. However, it would also diminish aggregate demand a bit. So, instead of using the $75 billion to reduce the deficit, spend it on unemployment benefits, food stamps and the like for two years. That would surely put more spending into the economy than the tax hike takes out, thus creating jobs.
How much more? Getting a numerical estimate requires the use of a quantitative model of the U.S. economy. In recent testimony before the House Budget Committee, Mark Zandi of Moody's Analytics used his model to estimate that extending unemployment insurance benefits has almost five times as much "bang for the buck" as making the Bush tax cuts permanent.
Based on his estimates, the budgetary trade I just recommended would add almost $100 billion to aggregate demand over the next two years—without adding a dime to the deficit. That translates to about 500,000 more jobs each year.
Blinder reiterated those assessments Wednesday, and indeed went even further, saying he thought at the time that the Bush tax cuts for upper income Americans were like "piling on" -- worsening the effects of income inequality. On the conference call, Blinder said of the tax cuts for the rich "it would have been better if they hadn't been enacted." Letting the top income tax cuts expire, he said, would allow us to use the additional funds for things that would stimulate the economy more directly, such as unemployment insurance, food stamps and jobs programs, while also lowering deficits long-term.
"Not all budgetary dollars are created equal," Blinder said. "Some have a bigger bang for the buck." He estimates the stimulative multiplier effects on GDP of a dollar used for unemployment benefits or food stamps to be 1.6 to 1.7, while those for all of the Bush tax cuts would be about .35 -- and even less for just the tax cuts for the wealthy.
Blinder and Mark Zandi of Moody Analytics also released a detailed study this week which estimated that without the combination of monetary and fiscal stimulus measures taken since late 2008, job losses would have exceeded 16 million -- more than twice the 8 million lost in the recession -- and that we would now be in a deflationary second Great Depression.
Yesterday's conference call was organized by the Center on Budget and Policy Priorities which has also urged an end to the Bush tax cuts for the wealthy, estimating that would free up nearly $90 billion in the first two years.
A version of this article was originally posted at Working America's Main Street blog, where I am a featured guest blogger
The author is the winner of the 2010 CREDO Mobile/Netroots Nation award for Blog Activist of the Year