Friday, January 18, 2008

Rebate reprise 

President Bush has decided to replay his 2001 tax cutting plan by calling for a temporary tax cut. He seems set on the size of the cut -- $145 billion, which he directly tied to the concept of it being 1% of GDP -- and wants it focused only on tax cuts that are immediate and temporary. That's broadly what the politicians want and what Bernanke argued for. Economists, not so much. "The same old shinola" says Angus, pointing to the Shapiro and Slemrod analysis. The textbooks typically say so as well. Indeed, in a certain macro textbook I find this paragraph:
The accompanying table compares various components of national saving in the first quarter of 2001, before the tax cut was enacted, and in the third quarter of 2001, after taxpayers had begun to receive rebates and to benefit from reductions in tax rates. Government saving fell by $277 billion (at an annual rate) from the first quarter to the third quarter in 2001, reflecting the losses in tax revenue. But during that same period, private saving increasesd by $180 billion, so that national saving fell by much less than government saving...Private saving increased by about two thirds of the decrease in government saving, so that national saving declined by only about one third of the decrease in government saving. (p. 126)
One of the authors of that textbook said yesterday:
To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next twelve months or so.
Watch this video provided by the WSJ wherein they interview people on the street about what they would do with a tax cut. Count the number of people interviewed (I had 12) and the number who say they would save the tax cut or pay off debt. I saw 8 or, mirabile dictu, 2/3 of the people interviewed.

Interestingly, the only candidate left who has said we do not need a fiscal stimulus is Fred Thompson. Maybe he read the textbooks.

Worth also reading on this topic: Mish, Jim Hamilton (who argues that Bernanke was being clever in outlining a fiscal policy that cannot be done) and for my grad students, a reading list from Gerald Prante.

UPDATE: Andrew Samwick: "Forget the "stimulus" label, this is merely additional deficit spending." Professor? Mr. Thompson, line one.