Taking money from one person (e.g., those who bought all the Treasury debt issued to fund the deficits created by the "stimulus" spending) and handing it out other people so that they can, for example, more easily buy a house, trade in their old cars, reduce their tax owed, or buy food, all on a one-time basis (thus not effecting permanent or long-lasting changes in people's willingness to work or invest) can hardly be expected to grow the economy. Growth of the kind that raises living standards requires more than just spending money or boosting demand; it requires spending money in a way that results in utilizing existing scarce resources in a more efficient manner: e.g., working harder, working smarter, making more with less, creating new products and services. A bureaucratic reshuffling of income is highly unlikely to unleash the miracle of growth; only the private sector can do that.
In short, ARRA was a laboratory experiment in the power of the government spending multiplier to grow the economy by "stimulating demand." It ended up proving that the multiplier is way less than one. American taxpayers borrowed $840 billion only to learn that the payoff was only a small fraction of the additional debt incurred. We wasted almost a trillion dollars of the economy's scarce resources, and that's a big reason why the recovery has been so disappointing. If we had instead "spent" the money on lowering tax rates for everyone (e.g., we could have eliminated corporate taxes for three years with the ARRA money spent) in order to give them a greater incentive to work and invest, the results could have been dramatically better. The tax cuts might even have paid for themselves in the form of a stronger recovery over time.
You can see all the distressing facts and figures at recovery.gov. I've reproduced some key charts and a summary of the data below (click each to enlarge):
Your number one preferred stimulus measure was to eliminate the corporate income tax for three years which would have " . . given them a greater incentive to work and invest." ??
ReplyDeleteCorporate profits have been at record levels for the past three years. Corporate retained cash & equivs. is by far the highest ever recorded. Bank excess reserves are over $1.6 Trillion -- up from basically zero over the past 4 years.
What more incentive for corporations and banks to invest could there possibly be in view of the above stats??
The problem for the economy is lack of aggregate demand. You may not like that diagnosis because it smacks of Keynes, but there is no better explanation.
Corporations invest in projects whose after-tax returns produce profits that exceed their cost of capital. U.S. corporate tax rates are the highest in the developed world, and huge deficits raise the specter of higher future tax burdens. This tax environment poses a huge challenge (a very high bar) to new investment.
ReplyDeletePermanently lowering corporate tax rates would dramatically lower the bar to new investments, and most likely therefore result in more new investment.
Note also that a significant amount of corporate profits is held overseas. This money is not available for new investment here because corporations are extremely reluctant to repatriate those profits since they would be subject to egregious double taxation.
If you increase the after-tax rewards to anything (such as new investments) you are very likely to get more of it. As Art Laffer always reminds us.
The ARRA is proof that the problem is not a lack of aggregate demand.
No, don't cut taxes for everyone; only the rich. Oh wait - that's what the Bush tax cuts did...
ReplyDeleteAnd don't you cut that defense spending! Otherwise all those figures from James Baker to "shoot-in-the-face-Cheney" won't get filthy rich.
Romney has the right idea. If we eliminate enough loopholes and deductions it is perfectly feasible to also reduce marginal tax rates across the board, for everyone. The tax code grossly distorts economic activity as it stands today. Making it more neutral (flatter, with fewer deductions) could contribute significantly to the efficiency and strength of the economy. This is not about handouts to the rich. It is about establishing the proper incentives for as many people as possible.
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ReplyDeleteScott,
ReplyDelete- Is targeting +2% or so inflation ad infinitum considered redistribution?
- Is the current accommodative policy penalizing savers who diligently managed their assets considered redistribution?
- Does Chinese macro policy of penalizing savers in favor of the export/industrial sector considered redistribution?
I would argue the current accommodative monetary policy across the globe is significantly distorting the economics of savings and investment far beyond the measly $840B dumped by Congress. $840B doesn’t even sound like a lot anymore. Which is directly attributable to the Federal Reserve.
The Fed response to "How Does the Fed's Monetary Policy Affect Savers and Investors?
"The way for the Fed to support a return to a strong economy is by maintaining monetary accommodation, which requires low interest rates for a time. If, in contrast, the Fed were to raise rates now, before the economic recovery is fully entrenched, house prices might resume declines, the values of businesses large and small would drop, and, critically, unemployment would likely start to rise again. Such outcomes would ultimately not be good for savers or anyone else."
http://www.federalreserve.gov/newsevents/speech/bernanke20121001a.htm
The Fed distorting prices and incentives is always the answer to everyone’s woes...
Public:
ReplyDeleteTargeting low and stable inflation is a great non-redistributive policy (tho 0-1% might be better than 2%).
I agree completely that Fed policy is distorting things and penalizing savers. When the returns to saving are zero, expect fewer savings and thus weaker growth.
Trade policy also distorts things, but if the Chinese insist on selling us subsidized stuff we would be fools to say no.
I have long said that federal outlays be cut back to 15 percent of GDP.
ReplyDeleteI am less rectitude-y about who the money is collected from. My guess is that the rich should pay the bulk of it.
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ReplyDeleteYou're calling for measures that result in "working harder, working smarter, and making more with less," which is increasing efficiency. The issue is, increasing efficiency is BAD for the short term (primarily unemployment). Yes it is great for the long term, but when unemployment is already an issue, why do you want to encourage more unemployment by increasing efficiency? If people can do more with less they have less reason to hire more people or even keep the staffing they have.
ReplyDeleteThis is actually a part of the issue we're facing, and why some of the jobs lost simply aren't going to come back, we have been increasing efficiency, thus don't need as large of a work force. According to the BLS, since Obama took office US productivity (efficiency of the active workforce) is up 7%. During that time, no one was having a problem increasing worker efficiency, so what would we have really gained from the government further encouraging efficiency?
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ReplyDelete