Tuesday, January 15, 2008

Thus all eyes turn to Bernanke 

In a very useful article reviewing the options on a fiscal stimulus package, the Congressional Budget Office offers a table that shows the characteristics of various proposal along three criteria:
  1. cost-effectiveness, in terms of what it does to demand relative to what it does to the budget deficit if no other changes are made;
  2. effectiveness lag, the time that elapses between the time you enact a stimulus and when it takes effect on the economy; and
  3. effectiveness uncertainty, meaning how sure are you that it will stimulate?
For example, the GOP wish to make the Bush tax cuts permanent are scored small, long and small. We know it's expensive; it will most likely have little effect on 2008 aggregate demand (a debatable point, I suppose, if you think people are already saving up for higher taxes in 2011, but I don't think even Art Laffer would buy this one); but we know that if we did if it will stimulate the economy eventually. This is sufficient to make most people argue against the plan (see Paul Krugman, for one.) Public works spending falls under the same classification.

If what matters most is the quickness of the stimulus -- you need it now, right now! -- you would argue either for a tax cut that begins now in 2008 or for extending unemployment insurance or food stamps. But the share of people unemployed more than 26 weeks isn't any higher than it was two years ago. Not sure how that helps.

Everything else in the proposals out there has a variety of issues as well, as the report points out. So the one thing nobody is arguing for -- tax cuts today, on top of the Bush cuts -- appears to be the one that gets a relatively certain effect quickly. But that is probably too expensive for most legislators to bear. No wonder most people are looking instead for monetary policy to help instead.

Menzie Chinn takes a different look at some fiscal proposals, and argues as well that any permanent tax cut is probably not fiscally sustainable. Brad DeLong wants tax refunds, but he admits they aren't well targeted, so their effectiveness uncertainty is large.