3rd time is not a charm
By Fester:
I support significant deficit spending this year. I support massive public expenditures this year. I don't support stupidity. And it looks like stupidity will be coming down the pike on Obama's tax policy.
The incoming administration is considering tax cuts of $1,000 for couples and $500 for individuals that will be delivered by reducing the tax withheld from paychecks. That plan has been estimated to cost about $140 billion over 2009-2010.
The lump-sum rebates issued earlier this year were used by many people to pay down debt, rather than spending the money and boosting the economy as the administration had hoped.
"People need money in their pockets to spend," Axelrod said. "That'll get our economy going again."
This is a stupid and ineffective stimulus policy, for a couple of reasons. First, it is a permanent policy when stimulus packages should be temporary. Secondly, and more importantly, it is not well targeted. If the cut is in income tax rates, then the primary beneficiaries are people who are doing okay right now instead of the most cash and credit constrained. Stimulus to be effective must be delivered to people who have a high propensity to spend every additional dollar in a fairly short time frame. Unless the tax cut is made fully refundable, which it will not be as the Senate Blue Dogs and the Senate GOP will bitch and moan about handouts, the people with the highest velocity of money won't be getting much of the money.
Instead the forty or so extra dollars per paycheck that couples will receive will most likely go towards paying off debt. Given that one of the major problems in the economy right now is that banks and other lenders are sitting on cash and not lending it out, paying off debt will improve the individual level balance sheet by effectively parking the cash in a vault. That is what my wife and I will do with any marginal income because it is individually rational for us to effectively trade credit card interest rate debt for a 4.0% federal loan. We'll free ride and let other people spend and take the risk of a snapback.
I understand the politics of this tax cut. It fulfills a campaign promise and it makes the median voter, and not the median adult significantly better off. However it is horrendous policy as it is a permanent reduction in revenue in the out years and there are numerous other policy alternatives that provide both a larger bang for the buck on the stimulus perspective AND create valuable new public goods and assets.
It is crap policy, and we should expect better than that.
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