A word of disclaimer before we get into the heavy money talk: I am not an economist. Economics is one of my minors, but among my areas of focus, it is probably the weakest, behind hard science, politics, and technology. Having said that, let us move on.
Tax cuts, in a snip, do not work. In terms of real GDP Rate of Retun (RoR), they provide the smallest return of all the governmental incentives. RoR is defined as how much money gets pumped back into the economy versus how much is spent. $1.00 RoR is 100%. Anything over that means that the economy gets more back than the government spends.
The RoR for some government programs follows. (Figures here)
(One year $ change in real GDP per $ reduction in federal tax revenue or $ spent)
- Food Stamps: $1.73
- Extending Unemployment: $1.64
- Infrastructure: $1.59
- Direct aid to state and local governments: $1.36
- Payroll tax holiday: $1.29
- Across the board tax cut: $1.03
- Non-refundable lump sum rebate: $1.02
Now, the permanent ones.
- Extend Alt. Min. Tax: $0.48
- Eliminate dividend and capital gains: $0.37
- Cut corporate tax rate $0.30
- Make Bush tax cuts permanent: $0.29
As you can see, cutting taxes temporarily is a null idea, while cutting them permanently, especially for those in the upper classes, is a colossally stupid idea, with little to show for it except massive gains in the national debt, and unfortunately, even the Chinese are wizening to the fact that we may not be good on those treasury bonds forever.
Spending is a far better choice for our stimulus package. Why is this? Well, a dollar spent is a dollar spent. Lets put it this way. Imagine you get a check for five hundred dollars (this is in fact, exactly what the government has tried before, as recently as last year). What do you do with it? Lets explore three scenarios with three imaginary people. Lets call them Chris, Jessie, and Joel.
1. Chris runs out and buys a PlayStation 3, a couple of Blue Ray movies and a copy of Fallout 3.
2. Jessie pays off her Visa bill and puts the rest in savings. Her mom is super proud.
3. Joel takes a road trip to his buddies in Portland, and the three of them have night on the town.
Now, lets analyze what effects that had. Chris just sent nearly all of his money to China and Japan. Jessie did what many people do, but didn't actually consume anything. Joel spent the money on local businesses. He was the only one to actually contribute the GDP.
Spending on infrastructure is successful, and it works immidiately. It injects cash directly into the system, and gets people employed. Want proof? It already has. The New Deal. If you live in Washington, Oregon, California, Montana or Idaho, the computer you're reading this on is being powered by Seattle City Light and its flagship power-plant, the Grand Coulee dam, a new deal project. Projects employ people, who then go spend their new-fangled paychecks on food, heat, and the occasional movie. All these things contribute to the economy, and directly inflate real GDP.
Moreover, and this is perhaps the most important part. Without infrastructure, nothing happens. The fabled free market is a myth. None of the wealthiest companies on earth could have made a penny without the free roads, power grids, bridges, and airways provided by their federal, state and municipal governments. BP makes in a third of a second what a sub-saharan African makes in a year, but that couldn't be possible without the roads to deliver their crude. On and on it goes. And no one can argue that we don't need it. For years, experts have been pleading and begging, and no one listened, with disastrous results. My wife teaches in a school that is literally crumbling. We drive on roads that are covered in pot holes. Mass transit can't really get off the drawing board east of the Mississippi because of lack of funding. Stimulus spending is needed, and its needed now.
As always, I welcome disagreements from any point in the ideological spectrum.
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