A week or two ago, Greg Mankiw and Nate Silver had a bit of a back-and-forth on stimulus vs tax cuts. In order:
Ignoring the attitude readily apparent on both sides, I was struck by how much this tiresome debate over taxes vs direct stimulus actually misses. Indeed, many of the other macroeconomic factors seems equally important, and without solving these other problems, the current debate — while fun and exciting — is ultimately pointless.
Tyler Cowen’s 8 reasons we are in a recession:
- We have zombie banks.
- There is considerable regulatory uncertainty in banking and finance.
- There is a negative wealth effect from lower home and asset prices.
- There is a big sectoral shift out of real estate, luxury goods, and debt-financed consumption.
- Some of the automakers are finally meeting their end, or would meet their end without government aid.
- Fear and uncertainty are high, in part because they should be high and in part because Bush and Paulson spooked everyone.
- International factors are strongly negative.
- There is a decline in aggregate demand, resulting from some mix of 1-7.
I don’t think any serious person would argue with this list.
As I see it, the problem with stimulus seems to be that it doesn’t address anything but decreased aggregate demand. A real problem, sure, but not the only problem.
To my way of thinking, tax cuts will do a couple of things:
- Offset some of the negative wealth effects associated with depressed home and asset prices.
- Offset some of the longer-term effects of our debt-financed consumption of the last 8 years. I see a tax cut as being better for individual credit card companies and loan companies than it is for the economy as a whole. If the money returned to the taxpayer is used to pay down debt, it does nothing for the macroeconomy in the short run.
Stimulating demand directly through government purchasing/construction/etc sidesteps these two problems. But it also does nothing to help with anything except problem #8, especially if you’re looking at a multiplier of ~1.
All in all, which one is “better” is a pointless argument because a sound plan would have both. (And indeed the recovery act has both.)
So where are the policy debates over zombie banks? There’s debate over better regulation, but it’s not especially informed debate; it’s more like “Omg we need more regulation!” where regulation is left undefined for all intents and purposes as far as I can see.
Why aren’t we talking about negative wealth effects? We can impact them somewhat directly via tax credits, but nobody is talking about tax credits for this specific reason. Maybe because explaining what a negative wealth effect is to a layperson is difficult to do? I don’t know. It’s not sexy? That seems a more likely explanation. It’s not terribly partisan? That seems even more likely.
The auto industry is obviously being hotly debated, and conservatives seem to think that a chapter 11 restructuring is the best way to go. I don’t necessarily disagree with that, but going through chapter 11 requires financing… otherwise it turns into a chapter 7 liquidation, which is clearly undesirable. How about making the auto bailouts contingent upon using that taxpayer money to restructure, in effect making the taxpayers the DIP financiers? I haven’t heard that mentioned as a possibility, but I hardly think I’m the only person on the planet who hasn’t wondered if this could be done.
How can we restore consumer confidence? The new administration taking office will help with that somewhat, but I don’t see any ready-made solutions in the economists’ handbook except for (maybe) time and getting the other 7 factors under control.
In the final analysis, I want to know why we are beating the stimulus vs tax cuts drum exclusively when there are so many other factors in play. Krugman’s hammering of the Keynesian, great depression angle seems incredibly narrow because this recession strikes me as being somewhat different, and supply-siders like Mankiw hammering the tax credit/cut/rebate angle miss so many other factors that need to be talked about. (Though to be fair, Mankiw doesn’t talk exclusively about the tax angle the way Krugman seems to with his Stimulus Now! rhetoric.)
Am I totally off-base in thinking that both sides are being somewhat partisan, here, which is ultimately bad for meaningful discussion?