Nate looks at a document the Obama transition released yesterday. The document shows the Obama team's estimate of the impact on GDP of government spending and tax cuts. The result? Government spending gives you 50% more bang for the buck than tax cuts. Nate rightfully asks:
[I]f Obama thinks tax cuts are liable to be less effective than spending, why is he advocating for them in the first place?I'm not sure, however, that I agree with Nate's last point:
....
the point is, right now, Obama's economists find the arguments for spending more persuasive than the arguments for tax cuts -- as do most (although hardly all) private and academic economists.
So to repeat: If Obama thinks tax cuts are liable to be less effective than spending, why is he advocating for them in the first place?
The rationale his economists give in the paper is that tax cuts are liable to go into effect more quickly than spending, since there are a limited number of "shovel-ready" projects available whereas tax cuts can begin having benefits almost immediately. This is a fine enough argument, but the efficiency gap that Obama posits between tax cuts and spending is large enough that it would seem to warrant at best a small fraction of the stimulus to be spent on tax reductions, rather than the 40 percent or so that Obama has proposed to spend now.
I think it's important for advocates for a larger stimulus to be focused on maximizing the $500b number as opposed to minimizing the $300b number; the scent of $300b is something that seems to have thrown both sides off the trail.The problem, I think, is that the $300bn in tax cuts aren't in addition to the $500bn in government spending. I think, instead, we're talking about a zero-sum game. The increase in tax cuts was paid for by decreasing the amount in the bill alloted to government spending - the overall total of the bill, $750bn to $800bn remained the same, even as the tax cuts were increased. If that's the case, then the simulus bang for the buck has been weakened by the proposed tax cuts.
