Posted on 10/30/2010 9:00:43 AM PDT by Jeff Winston
...the Administration could have created a package that stimulated the economy in the short term while improving economic performance in the long term. This package, moreover, would have been immune to criticism from Republicans. The stimulus adopted was a missed opportunity of colossal proportions.
That the Administration and Congress chose the particular stimulus adopted suggests that stimulating the economy was not their only objective. Instead, the Administration used the recession and the financial crisis to redistribute resources to favored interest groups (unions, the green lobby, and public education) and to increase the size and scope of government. This redistribution does not make every element of the package indefensible, but even the components with a plausible justification were designed in the least productive and most redistributionist way possible...
As it turns out, the empirical support for the Keynesian view is far from compelling. The model implies that the impact of increased spending should be greater than the impact of tax cuts, but the existing evidence suggests the opposite. Indeed, some empirical evidence finds minimal impacts of spending, but most research finds a robust impact of tax cuts...
Another way to describe the choice between spending and tax cuts is to note that under increased spending, the political process decides how to spend the money, whereas under tax cuts, consumers and firms get to decide how to spend the money. Thus, the crucial difference between the two approaches is not whether one accepts the Keynesian model but whether one believes governments or markets make the best decisions about allocating resources...
The crucial feature of these changes in tax and transfer policy is that most were not reductions in tax rates and therefore did not improve incentives. Some of these provisions are neutral regarding incentives... Yet many other changes, such as extended unemployment insurance and additional spending on Medicaid, reduce the incentive to work...
The single best change would have been elimination of the corporate income tax. This component of the current tax system is utterly misguided, independent of Keynesian considerations. The corporate income tax means double taxation of corporate income, which distorts the incentive to save and invest, thereby lowering productivity and growth. The corporate income tax adds a huge level of complexity to the tax code, reducing the transparency of corporate accounting. The standard defense of this tax relies on a desire to redistribute income and assumes that the tax falls on high-income taxpayers because they own a disproportionate share of corporations. The tax, however, likely affects labor as much or more than shareholders, especially because corporate income taxation drives corporate activity overseas...
A second change in tax policy that makes sense from both the Keynesian and cost-benefit perspective is a reduction in employment taxes such as those for Social Security or Medicare.
This would lower the costs of hiring workers, thereby stimulating increased employment. This change would also improve economic efficiency because employment taxes are a wedge between worker willingness to work and firm willingness to hire. A reduction in employment taxes would especially benefit low‐to moderate-income workers, precisely the group targeted by the other policies in the stimulus package...
Taxes dedicated to Social Security and Medicare are, in any case, not good policy. They exist to perpetuate the myth that any given individual’s contributions pay for that individual’s benefits, but because the systems are run on a pay‐as‐you‐go basis, this story is just political spin. Eliminating these separate taxes, and if necessary raising other taxes, would produce a simpler and more transparent tax system...
The third problem is that energy‐efficiency programs are ineffective methods of reducing energy use. Consider upgrades of the federal government’s vehicle fleet. Hybrid cars require less energy to operate than standard cars, but hybrids cost more than standard cars, and these higher costs result in part from additional energy required for their manufacture. Thus, upgrading the fleet might not reduce energy use and could even increase it.
Rather than trying to promote energy efficiency with slow-acting and ineffective energy programs, the right approach is higher energy taxes, which directly raise the price of energy and discourage its use.
The right way to reduce energy use and stimulate the economy, therefore, is to increase energy taxes while lowering other taxes enough to offset the higher energy taxes and provide the desired amount of stimulus...
If most of the beneficial roads have already been built (for example, those connecting major centers of population in densely populated parts of the country), then new roads will be highways to nowhere and a waste of economic resources...
The Administration... just assumed that because research is good, more is better. Research spending is again unlikely to use unemployed resources and instead enriches those already employed while shifting research activity from the private sector to government...
A few weeks after President Obama’s victory in the 2008 election, adviser Rahm Emanuel quipped that “[y]ou never want a serious crisis to go to waste . . . [because it] provides the opportunity for us to do things that you could not do before.”
Emanuel was correct: The situation in which the new Administration found itself constituted an unusual political dynamic that, properly used, would have allowed the Obama Administration both to stimulate the economy and make it more productive over the long haul.
The Administration should have endorsed a stimulus package based on a repeal of the corporate income tax and reductions in employment taxes. This policy would have accomplished its stated goals, and the budgetary implications would have been less negative than those of the package ultimately adopted because this alternative plan would have enhanced rather than detracted from economic efficiency. This approach would also have been difficult for Republicans to oppose.
Yet the Administration did not take this approach, presumably because its true goals were not just economic stimulus. Instead, the Administration wanted to reward its constituencies (unions, environmentalists, public education) and increase the size and scope of government. This tactic is consistent with the Administration’s policies in general. Across the board, it has taken a big government, redistributionist approach, whether regarding housing, unions, health, the auto industry, trade, antitrust, or financial regulation. The Administration’s view appears to be that government is better than individuals at deciding how taxpayers get to spend their money and that government should engineer large transfers from richer to poorer.
Whether the Administration’s stimulus package will be successful is still to be determined. If the extra spending ends up being productive, then the impact of the stimulus might be positive on net. My own prediction, however, is that the programs adopted will generate large distortions and substantial waste, with minor stimulus impact. This is a pity because much better alternatives were available.
unions, the green lobby, and public education
these are exactly the groups that produce nothing help out in no way at all and are causing the destruction of America.
Thanks Obama
You sure helped to cause the communist-ation of my wonderful country .
But as you told Dr. John C Drew PhD at Occidental College, this was your plan all along, wasn’t it?
If most of the beneficial roads have already been built (for example, those connecting major centers of population in densely populated parts of the country), then new roads will be highways to nowhere and a waste of economic resources...
Maybe that could be a slogan for the whole Obama administration: “Highway to Nowhere.”
I’m a bit surprised this thread hasn’t attracted more attention and comments. It’s really a pretty good summary of the dynamics of the whole “fiscal stimulus” boondoggle. I guess economics just isn’t very sexy, even on FR.
Thank you for posting that.
I’m a bit surprised this thread hasn’t attracted more attention and comments.
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