Flying Pink Unicorns

I am disappointed with the news today regarding Obama's stimulus plan.

http://www.nytimes.com/2009/01/05/us/politics/05spend.html?th&emc=th

First, the leaks indicate that the economic package is to cost between $675 and $775 billion. Although clearly substantial enough to do a lot of good, this is less than I would like, and have advocated. The US GDP is about $14 trillion. Assuming this money is spent evenly over only 2 years (which is not accurate, but I'm simplifying) that means that assuming a $700 billion package, that would be $350 billion each year, or 2.5% of GDP. Now that's not nothing to be damn sure, but with the economy shrinking at about a 5% rate, it isn't quite enough to ensure a return to growth. However, coupled with the enormous amount of stimulus already in the pipeline, as I discussed in my December 5, 2008 post, this package may well be sufficient to lift the economy out of recession. If it packs enough stimulative punch. Which brings me to my real problem with the leaks about the package.

According to the above-mentioned New York Times article, Obama plans for his stimulus package to include "about $300 billion in tax cuts for workers and businesses."

The current plan is to devote about 40% of the cost of the stimulus plan to tax cuts, "including his centerpiece campaign promise to provide credits up to $500 for most workers, costing roughly $150 billion."

I suppose given that it was an often repeated campaign pledge, and will not go to the wealthy, I really can't squawk too badly about this $150 billion.

However, the remainder of the tax cuts I am really not happy about, especially in the context of a somewhat smaller package than I would have liked.

First, why am I not jazzed about tax cuts as part of the stimulus package? Well, consumers are tapped out and heavily in debt, and will tend to save this money or pay down debt. I could live with this amount of tax cuts as part of a larger overall package, but the leaked plan leaves "only" approximately $400 billion in spending over two years, or $200 billion per year. This represents only approximately 1.5% of GDP for each of those two years, not nearly enough spending to have the impact I was looking for.

Second, the tax cuts other than the aforementioned tax credits for each worker earning less than $200,000 per year will likely be particularly ineffective.

The first major business tax credit I am unhappy about is one which, "[t]o encourage businesses to expand their work forces and operations, Mr. Obama wants a tax credit for each job created. During the campaign, he proposed $3,000 for each job." This is just silly. Most of the jobs thus created would have been created anyway. This is a wasteful business tax giveaway, and lousy policy to boot, as any marginal jobs created which would not have been create otherwise are, by definition, marginal (barely needed if at all), thus economically inefficient, and relatively less like to survive as jobs over a period of years.

The second tax credit referenced is not yet specific. The Times article stated, "Advisers said [Obama] was now also trying to figure out a way to give incentives to businesses to resist cutting jobs, as so many have been doing."

Tax incentives for businesses not to cut jobs is probably even worse than incentives to create jobs! Businesses need to cut back their workforces in order to maintain a sustainable size going forward. This is a hugely painful process, trust me, I know from painful personal experience, but is entirely necessary. Thankfully, this tax incentives probably won't make too much difference-- if a company needs to lay of 500 people, it really needs to lay them off, and a few tens of thousands of dollars won't make much difference.

Still, it would have been much better for the government to dole out money which would be spent, driving business and consumer demand. Then some of these businesses would in fact need the marginal worker created by the tax incentives to create jobs, and (although in fewer cases) the businesses set on cutting jobs would no longer need to do so.

Finally, and I suppose this doesn't at all surprise me, "The economic plan will also include other tax breaks intended to stir capital investment." It is my opinion that many of these tax breaks merely encourage investment which would have occurred anyway, and thus are primarily a giveaway to businesses. However, the money involved in these tax breaks is unlikely to be particularly huge, so the relative harm is somewhat limited.

I had been hugely optimistic based about the economic stimulus package based upon on what I heard from Team Obama. I am not prone to bouts of wild optimism! But the details which are now emerging about the stimulus package are disappointing. It will still be big and still be very much worth doing, but it won't have anywhere near the impact it could have.

I have no way of knowing, but I suspect that the large amount of tax cuts is done so as to secure moderate democratic and republican support, that is for political reasons not policy reasons. Sadly, any attempt to attract even moderate Republicans generally means making policy worse. But in the scheme of things, increasing the chances of passage, coupled with the huge momentum boost that would create towards the rest of Obama's agenda probably make $100 billion of wasteful tax cuts well worth it. And if the package were $100 billion larger I'd pipe down. But in a $700 billion or so package, $100 billion of almost entirely non-stimulative tax cuts, and $150 billion in only partially stimulative tax cuts constitutes a gigantic wasted opportunity. Still, when I first read the Times article I was hugely disappointed. The more I think about it, the more I am merely disappointed.