Stimulus Reality: Spending Creates VASTLY More Jobs Than Tax Cuts

by: Paul Rosenberg

Wed Feb 04, 2009 at 12:36

Mark Zandi s Chief Economist and co-founder of Moody's, where he directs the company's research and consulting activities.  His analysis "The Economic Impact of the American Recovery and Reinvestment Act, Mark Zandi - January 21, 2009" [pdf] contains the following chart showing the relative efficacy ("bang for the buck") of different categories of tax cuts and spending measures.  As can be seen, the spending measures deliver considerable more bang--particularly compared to the GOP favorites, such as making Bush Tax cuts permanent:

On the flip, I present an expanded version that adds information about how these differences translate into GDP and jobs, plus a snippet of commentary from Zandi.

Paul Rosenberg :: Stimulus Reality: Spending Creates VASTLY More Jobs Than Tax Cuts
Drawing on figures from Dean Baker, co-director of the Center for Economic Policy and Research, in "Spending Versus Tax Cuts: Who Pays the Cost of Political Compromise?" [pdf], I've expanded Zandi's table as follows:

As you can see, the only tax cuts that perform respectably are the refundable rebates and the payroll tax holiday--that's because unlike any of the others, they primarily benefit people of very limited means who will spend whatever money they get.  The others will just go to people who will either pay down debt or buy another jet.

In his analysis, Zandi says:

Income support

The House stimulus plan includes some $100 billion over two years in income support for those households under significant financial pressure. This includes extra benefits for workers who exhaust their regular 26 weeks of unemployment insurance benefits; expanded food stamp payments; and help meeting COBRA payments for unemployed workers trying to hold onto their health insurance.

Increased income support has been part of the federal response to most recessions, and for good reason: It is the most efficient way to prime the economy's pump. Simulations of the Moody's macroeconomic model show that every dollar spent on UI benefits generates an estimated $1.63 in near-term GDP.x Boosting food stamp payments by $1 increases GDP by $1.73 (see Table 2). People who receive these benefits are hard pressed and will spend any financial aid they receive very quickly.

Another advantage is that these programs are already operating and can quickly deliver a benefit increase to recipients. The virtue of extending UI benefits goes beyond simply providing aid for the jobless to more broadly shoring up household confidence. Nothing is more psychologically debilitating, even to those still employed, than watching unemployed friends and relatives lose their sources of support.xi Increasing food stamp benefits has the added virtue of helping people ineligible for UI such as part-time workers.

Aid to state and local governments

Another potent tool included in the House stimulus plan consists of some $200 billion in aid to state and local governments over two years. This takes the form of a temporary increase in the Medicaid matching rate to ease the costs of healthcare coverage; help to local school districts; and broader fiscal relief to states to prevent cuts in key programs.

More than 40 states and a rapidly increasing number of localities are grappling with significant fiscal problems. Tax revenue growth has slowed as home sales, property values, retail sales and corporate profits have all fallen. Personal income tax receipts have begun to suffer as the job market slumps. Big states including California and Florida are under severe financial pressure, and smaller states including Arizona, Minnesota and Maryland are struggling significantly. The gap between state and local government revenues and expenditures ballooned to over $100 billion-a record-in the third quarter of 2008, according to the Bureau of Economic Analysis.

Not surprisingly: (1) The Republicans don't have a leg to stand on. (2) Even with control of both houses of Congress and the bully pulpit of the presidency, the Democrats haven't managed to make this clear to the American people.

I've got to run, off to work until mid-afternoon PST.  But this information is so vital, so fundamental, and so missing that I just had to put it up now, rather than later.

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Bank restructuring (0.00 / 0)
There is a belief that banks prosper if the economy prospers. The reverse is true.

Banks prosper if they create debt and then earn interest on that debt and if they can foreclose on assets such as houses due to a failure to meet debt payments on time.

A restructuring of the banking sector needs to take this basic fact into account.

An example: a bank needs to have only a 5 per cent capital cushion. 95 per cent of the money it lends, it does not have. It is electronic digits.

A couple takes out a loan of 100,000 dollars and buys a house for 150, dollars, putting down 50,000 of their own money.

The banks charges interest on the loan and also forecloses on the house if the couple miss the mortgage payments.

So, for an initial investment of 5 ooo dollars, the bank gets not only interest payments on 100,000 dollars but also a real asset worth 150,00 dollars on foreclosure.

Another example: a bank gives a loan to a farmer for a new tractor. the farmer needs money to buy seed for the following year. The bank refuses, driving the farmer into ruin. The bank forecloses on his farm.

Another example: a bank gets a government to go to war, make debts and it earns vast interest on those debts.

The Fed needs to be nationalised and banks need to be restructed with a ceiling to the interest they can charge.

Bailout (0.00 / 0)
And don't forget, if banks engineer a crash of the economy, they not only get to clean up on lots of assets, they also get a trillion dollar bailout!

[ Parent ]
Thank you (4.00 / 1)
I was hoping to find some such analysis but was too lazy to go over to the economics blogs to get it.  

Darkness has a hunger that's insatiable, and lightness has a call that's hard to hear.  

Lies, damn lies, etc (0.00 / 0)
I support a greater spending component simply because I don't like tax cuts for a variety of reasons.  But I'm pretty unconvinced about the evidence here.

Where do these numbers come from? "A large-scale econometric model of the US economy," says Footnote x.

What does that mean?  Ultimately, it means that some economists constructed a model based around a million assumptions that may or may not hold, pressed a couple buttons, and a computer spat out some results.  That's what it is, nothing more and nothing less.

The truth is that there is really no strong evidence to conclude that spending is better or that tax cuts or better.  People have constructed models that lead to either conclusion.  People have done empirical studies that suggest either conclusion.  This is why economics is the dismal science.

John McCain: Health insurance for low income children represents an "unfunded liability."

And Zandi was one of McCain's economic advisors... (4.00 / 2)
but I guess Joe the Plumber's arguments won out.

Well, You See, (0.00 / 0)
Joe really wasn't a plumber, whereas Zandi really was an economist.

So, naturally...

"You know what they say -- those of us who fail history... doomed to repeat it in summer school." -- Buffy The Vampire Slayer, Season 6, Episode 3

[ Parent ]
Business cuts are worst (4.00 / 4)
It is worth noting that the two lowest returns are for accelerated depreciation (.25 multiplier) and permanent business tax cuts (.30).  The $140 billion for business tax cuts is a rip off for the corporate gentry, period.  Better to spend the money on infrastructure (1.59) , unemployment or food stamps.

Money that is immediately needed provides the biggest boost.  That argues specifically for targeting any tax cuts to exclude the wealthy.  What do you know, good deeds make good sense.

nice post Paul (4.00 / 1)
thank you

great post (0.00 / 0)
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