A Short Rant About The Stimulus Package

I don’t expect politicians to always tell the truth. I know they have to please a diverse group of people who don’t all agree, which leads to a substantial number of half truths. But what I can’t stand is when politicians consistently make factually untrue statements. This past Sunday I was sitting at home enjoying a cup of coffee and a bowl of cereal, trying to relax by watching Meet the Press before going to work, but before I knew it I was literally yelling at my computer (I don’t have a TV).
The subject being discussed was the current stimulus package going though the house and senate. The two republicans on the panel were making claims that anyone who has taken macro econ 101 knows are factually incorrect. Republicans appose this bill because they believe it is too dependent on government spending and doesn’t have enough tax cuts. Republicans in both the House and Senate claim that the bill is full of wasteful government spending that will not stimulate the economy and tax cuts are the only real way to stimulate the economy. This is false.
Let’s ignore for the moment that the $787 billion bill is actually about 42% tax cuts. The claim that tax cuts are more effective than government spending is just untrue. Why? It’ simple, stimulating the economy simply means stimulating demand. Currently demand is shrinking, which means productions decreases, which means people get laid off, which means demand fall more…get the idea. Government spending directly stimulates demand for goods and services in the economy, especially when the government spends money on labor intensive things like public works projects, which generates lots of employment. The problem with tax cuts is that they just don’t create as much demand for good and services per dollar. The problem is that people just don’t spend all the money we give back to them, we’d like them to, but they save some of it, which dampens the effect on aggregate demand.
This isn’t just theory either (because we have a knack for getting that wrong). Moodys.com calculates the multipliers for various types of fiscal stimulus. According to them, for ever dollar of tax cuts aggregate demand goes up by $1.02, for every dollar spent by the government on infrastructure investment aggregate demand goes up by $1.59. It’s not even close! Besides after the stimulus plan is done with we have better roads and bridges instead of just a few more Xbox 360’s (which is what I’ll spend my refund on).
Opponents of this bill also claim the government spending won’t work because the spending is on wasteful things, that the bill is full of earmarks and pork barrel spending. I can’t really comment on how wisely the money is being spent (I of course haven’t looked at the bill) but I don’t have to. The claim that government spending only stimulates the economy when it is worthwhile, smart spending is also completely false. To paraphrase Keynes, we could literally pay people to dig holes and fill them back up again and it would stimulate the economy. Now of course we’d prefer not to, and I don’t think we will, but the point is that we could.
I have so far not been completely fair to the proponents of tax cuts, because they do serve a very important purpose in stimulating the economy in situations like today. They work fast. As effective as government spending is, it has to be spent before we can stimulate the economy, and simply put its hard to spend $787 billion dollars. There are only so many projects that are ready to break ground today. Quite a bit of this money won’t be spent for at least 16 months. Therefore it does make sense to couple the spending with some tax cuts, but like I already said the current bill is about 42% tax cuts, more than enough given the vast difference in their multipliers . But I won’t concede this point to the Republicans because if this was really their argument, they would be just as happy to increase transfers as decrease taxes. Unfortunately they were less keen on increasing transfers, specifically funding for food stamps (something they fought to get removed from the bill). Oh and by the way, guess what type of fiscal stimulus has the highest multiplier. Yep, food stamps. For every dollar we spend on food stamps aggregate demand increase by $1.73.
I don’t expect our elected officials to stop letting half truths. But wouldn’t it be great if when discussing something as vital as the state of our economy we could stop them from telling blatant lies that directly affect our material well being?

In the spirit of truth and factual accuracy I have tried to be as fair as possible to both sides, if any of you disagrees with me please let me know.

Phil