Economic Stimulus

The president is asking Congress for an economic stimulus package so that if the economy isn’t already in a recession, that it not go there.

U.S. Sen. Patty Murray stopped by our offices Thursday and had some thoughts on whatever’s proposed. She’s on the Senate Appropriations and Budget committees and said she was called this week by Treasury Secretary Henry J. Paulson, who asked for input.

We asked whether she thought “rebates” work and she answered that it depends. She was largely non-committal on specifics, though she said removing the 2010 expiration date on the Bush tax cuts doesn’t solve the immediate problem.

The Times story linked here does get into some discussion about the efficacy of “rebates.” The intent is to get people to spend money now.

Most economists agree that tax rebates are one of the fastest ways to lift consumer spending. They also agree that stimulus measures are most efficient when aimed at low-income or middle-income people, because they are more likely than affluent people to spend any extra money rather than save it.

According to estimates several years ago by Mark Zandi, chief economist of Moody’s, the measures that produced the biggest “bang for the buck” were increases in unemployment benefits, which produced about $1.73 in additional demand for every dollar spent. Tax rebates to all citizens generated about $1.19 for every dollar spent, while reductions in tax rates produced only 59 cents per dollar.

I’d argue, first of all, that they’re not really rebates. A rebate means you paid, for example, $100, and will get $70 back. Technically it could be true if the money the government sent you was because of a tax cut. If there’s no tax cut, the $1,600 is more like an advance, because you’ll have to account for it at the end of the year.

2 thoughts on “Economic Stimulus

  1. Steve,

    There are big differences among the three measures discussed:

    Increasing unemployment benefits is a redistribution of assets from taxpayers to non-taxpayers. They may be more likely to spend the money, but they didn’t earn it in the first place so there is a fairness issue involved.

    Tax “rebates”, as you noted, need to be accompanied by a clause that makes them a true rebate rather than a loan advance. That said, they are a one-time boost that does not get into a fight about the longer-term tax code.

    Reducing tax rates might have a lower annual effect, but rather than a one-time deal, it is 59 cents a year next year and the year after also.

    Of course all this will be subsumed in the Presidential election year politics. The Republicans will want to put the Democrats in the position of raising taxes by refusing to extend the Bush tax cuts. The Democrats will want to put the Republicans in the position of favoring “the rich” rather than redistributing assets to their base.

    There will also be competing visions of whether tax cuts increase revenue by stimulating spending (as they did the last time) or whether tax cuts represent a net decrease in revenues.

    Tell you what: give me a tax cut and/or rebate and I promise I will spend it all w/in 2 months.


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