A reader asks why not give folks a significant tax rebate say $3,000 in lieu of stimulus spending. My understanding is as follows:
Somewhat counter intuitively given the chronic under saving in the U.S., we need spending in order to get out of the paradox of thrift that emerges when fear overtakes greed within the economy. When most are fearful as opposed to interested in taking risks (i.e. investing or spending), most begin to save, if everyone saves the economy stalls as the level of activity shrinks and negative feedback loop is created (as less activity happens the fear grows leading to even more saving etc.).
Providing a rebate check will mainly end up saved as folks squirrel away their nuts for the economic winter. None of this is black and white, I have seen some studies claiming last year's rebates were spent rather than saved but most say their were saved.
An alternative obviously to spending would be a tax cut. The economists are engaged in full out war with another regarding the multiplier effects of spending v. tax cuts. Most (but not all) seem to support the spending as having a higher multiplier impact. Many conservatives add that tax cuts can have a faster impact than most spending initiatives. So one ends up with a trade off, faster tax cuts or slower spending with better multiplier impacts. This trade-off is why the Obama plan incorporates both.
Some (inc. me) would add the advantage of spending is that it does provide an opportunity to invest in things like infrastructure which many perceive as killing two birds with one stone (stimulus and making a needed investment). Republicans likely see tax cuts as also killing two birds (stimulus and cutting taxes something deeply ingrained in their ideology regardless of circumstances).
2 comments:
I agree there are infrastructure needs and have no problem with them in the package but they won't have much of an impact in 2009. Is there enough being done in this package to help us inthe short-term?
My view is that this downturn will last quite a while so that even if the spending takes 18 months or more to kick in they will be relevant. Personally would trade some speed for infrastructure as opposed to just kicking in more tax cuts.
Some economists specifically Paul Krugman are pushing for a bigger stimulus but $900 billion is a big start, they can add more later if necessary.
Keep in mind hundreds of billion more will be needed to TRY to address the fried banking system.
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