Monday, January 21, 2008

The closer we get to our expertise, the less partisan we get 

I have argued for years with people that they misunderstand Paul Krugman. He hasn't changed, only his subject matter has. When he writes about economics, I don't see nearly the degree of Today he posts on stimulus packages, and there's much sound analysis within.
The big problem with attempts to provide temporary economic stimulus is how to ensure that the money gets spent. As Milton Friedman pointed out 50 years ago, consumers tend to base their spending on �permanent income� � the income they expect to have over the long run � rather than their income in any given year. So an $800 check from the Treasury tends, other things equal, to be mostly saved rather than spent.
Seems I heard this somewhere before? So yes, I occasionally link to posts that agree with me. Vanity is a powerful motive. But he delivers the best point at the end. Arguing that there are those that don't have savings and therefore will be most likely the ones spending the money, he says
...if you want a stimulus plan to actually affect demand, it should focus on people likely to be liquidity constrained and on sustaining government spending.

But � you knew this was coming, didn�t you? � it seems that the Bush administration wants to restrict the plan to income tax rebates. This means excluding the people most likely to be liquidity-constrained � because people having a bad year probably won�t owe income taxes that year � and shying away from any aid to direct government spending.

The point is that the debate over exactly how the $145 billion or whatever gets allocated is not, as some might think, a second-order issue. It�s probably at the heart of whether this plan has any real effect.

On David Strom's show Saturday, David made almost this exact point -- why not put the money into extended unemployment benefits instead? My argument so far with that is that there just aren't that many people past 26 weeks. Not a bad idea, just not reaching enough people. But Krugman's right that the devil is in the details.

UPDATE: The above doesn't make Mark Perry's analysis wrong. He and Bruce Bartlett are in fact right about the history; we just never have aimed these things correctly. And maybe they cannot be.