John Petro
Let the Fighting Begin: The Politics of Passing a Stimulus Package
Paul Krugman talks about including tax cuts as part of a stimulus package. Basically, there aren't enough "shovel-ready" infrastructure projects to go around, and assistance for low-wage workers and for state and local governments don't add up to the amount of stimulus that many predict is needed to turn the economy around. Therefore, tax cuts are a viable stimulus tool. But the question remains: How much and for whom?
But then the Obama team must consider the politics of passing a stimulus package.
"And all the news reports say that the high tax-cut share is intended to assuage Republicans; what this presumably means is that this was the message the off-the-record Obamanauts were told to convey.
And that’s bad news.
Look, Republicans are not going to come on board. Make 40% of the package tax cuts, they’ll demand 100%. Then they’ll start the thing about how you can’t cut taxes on people who don’t pay taxes (with only income taxes counting, of course) and demand that the plan focus on the affluent. Then they’ll demand cuts in corporate taxes. And Mitch McConnell is already saying that state and local governments should get loans, not aid — which would undermine that part of the plan, too.
OK, maybe this is just a head fake from the Obama people — they think they can win the PR battle by making bipartisan noises, then accusing the GOP of being obstructionist. But I’m really worried that they’re sending off signals of weakness right from the beginning, and that they’re just going to embolden the opposition.”
It does seem odd to offer concessions before negotiations begin. But, that’s politics, not policy. Targeted tax cuts are good policy at this point in time. Keeping tax cuts out of the original stimulus plan might be good politics. Then Democrats could offer the tax cuts as a way to compromise.
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Posted at 12:02 PM, Jan 05, 2009 in Tax Policy
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Those of us who've worried, some quietly some aloud, about the center-right character of Mr. Obama's appointments have gotten our first taste of his center-right policy mismanagement. The tax cut proposals being leaked by the Obama team amount to reducing the "stimulus" or recovery program by 40% or more when everyone except the remnants of the GOP in Congress want a bigger package more carefully aimed. As the Economic Policy Institute points out in its excellent proposal for Main Street recovery tax cuts of the type proposed will produce almost immeasurably small benefits. ($1.02 worth of ecomic activity for every $1 spent). As a result, Mr. Obama's proposal amount to pouring 40% of his recovery program down the drain. This is bad policy.
Posted by: Daniel Millstone | January 5, 2009 01:11 PM
Daniel,
You're correct that 40% of the recovery program going to tax cuts is way too high, and that other forms of stimulus - public investment, public assistance, and aid to state and local governments - are more effective in terms of economic return. I called tax cuts "good policy" because 1) the stimulus package needs to be big enough to turn around the tanking economy and 2) there aren't enough of the "better" forms of stimulus to have a properly-sized stimulus package. That's why certain tax credits, such as credits for low-income individuals, are a good solution for the short-term.
Posted by: John Petro | January 5, 2009 01:52 PM
Daniel, the $1.02 figure, and the higher figures for increased spending, all come from one source: Mark Zandi. The reference in the main paper isn't even listed in the bibliography, which consists of many other think tank reports but not a single peer-reviewed paper. There's no indication in the paper about how Zandi arrived at his figure, or why we should trust Zandi and not the Republican thinktanks that say a tax cut will have more impact on GDP than a spending increase.
John, I have no trouble with tax cuts, as long as they're the right kind. Across-the-board reductions in payroll or income taxes will be good, as will cuts targeted at the poor. But Obama's proposal from the primary to extend the mortgage tax credit will cause more problems than it'll solve.
Posted by: Alon Levy | January 5, 2009 02:03 PM
This may be much to technical for many of us. Few of us know who Mark Zandi is for example (Chief economist for economy.com) or understand his critique of tax cuts as recovery tool. Those who are gluttons for punishment may want to look at an old, interesting but difficult Zandi article like this one here which critiqued the economic impact of Bush tax cuts. Personally, think our experience with the Bush tax cuts shows their uselessness as tools for generating economic activity.
Posted by: Daniel Millstone | January 5, 2009 03:32 PM
It's not that it's too technical; it's that it's badly sourced. Zandi never lets anyone know where his bang for the buck estimates come from, and never subjects them to the scrutiny of the economic community. He could be making things up for all I know. Even his main credential isn't that good - economy.com is the website of Moody, the agency that rated subprime mortgage bundles AAA.
Posted by: Alon Levy | January 5, 2009 04:50 PM