Tag Archives: stimulus

What the stimulus vs tax cuts debate misses

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:

  1. Mankiw’s NYTimes article
  2. Silver’s response
  3. Mankiw’s “teachable moment” reply
  4. Silver’s retort

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:

  1. We have zombie banks.
  2. There is considerable regulatory uncertainty in banking and finance.
  3. There is a negative wealth effect from lower home and asset prices.
  4. There is a big sectoral shift out of real estate, luxury goods, and debt-financed consumption.
  5. Some of the automakers are finally meeting their end, or would meet their end without government aid.
  6. Fear and uncertainty are high, in part because they should be high and in part because Bush and Paulson spooked everyone.
  7. International factors are strongly negative.
  8. 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:

  1. Offset some of the negative wealth effects associated with depressed home and asset prices.
  2. 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?

Now is not the time for a Pigovian gas tax

Wrote this a little while back. The macro policy bits in the second to last paragraph may or may not remain my opinion in the light of some of the data that Mankiw has posted here. Let’s just say my thinking is… fluid on the more Keynesian bits I’ve referenced. I’m going to have to read the whole paper (PDF) in the near future.

Several weekends ago, the Washington Post editorial board came out in favor of a Pigovian gas tax. A guest op-ed in the New York Times advocated essentially the same thing. For those unfamiliar with the concept, a Pigovian tax is a fee levied on a particular good or service designed to reduce consumption of that good or service to compensate for a negative externality. Even if the revenue raised from the tax is returned to the public in the form of an income subsidy, it has a real tendency to reduce consumption of that particular good or service, even though an individual has experienced no real drop in income. (They have not dropped to a lower indifference curve.)

In the case of gasoline, the tax has many reasons: pollution generated by the combustion of fossil fuels isn’t accounted for because clean air never enters a market system, therefore it has no market price so we treat it as free. (Obviously clean air has value even though we don’t buy or sell it.) Another externality is the US’s reliance on foreign oil, often provided by otherwise hostile nations who derive their economic power from US petrodollars. There are several other, more wonkish reasons for desiring a Pigovian gas tax as well.

In general, I consider myself a bandwagon fan of the Pigou club. I agree with their aims, and Pigovian taxes have demonstrated a remarkable ability to meaningfully compensate for externalities otherwise unaccounted for in a free market system. However, now is not the time to institute such a tax. At a time when the federal government is considering a large-scale stimulus package that certain Keynesians think needs to be in the neighborhood of US$600 billion to have any chance of working — a figure that jives with China’s US$585bn package — the tremendous drop in gas prices is equivalent to a US$318 billion stimulus package that Uncle Sam doesn’t have to ultimately borrow from China or sovereign wealth funds to put into play in the here and now.

This trumps any marginal environmental benefit that might be gained by instituting a Pigovian tax at this moment in time.

Recession economics suggest that when all normal tools of correction have been tried, the government should increase spending and/or cut taxes. Trying to close a budget deficit while in the middle of a recession will only exacerbate the economic turmoil, and you run a very real risk of pushing a recession into a depression. (Though a nation’s long-term stability obviously requires fiscal responsibility, which the US has been lacking in recent years.) Raising taxes takes money out of consumers’ pockets, and cutting government spending tends to lead lead to lost jobs. Obviously lost jobs and decreased consumer buying power are undesirable. Doing nothing can cause the recession to deepen, and doing too little is no better than doing nothing at all. The question isn’t whether we need a stimulus package, the question is how big it needs to be. Therefore we should take what the burst petroleum speculation bubble has given us, and let it ride until the current economic crisis has passed.

It would have been better for the WaPo and NYTimes to have published these pieces back in the spring and summer — not in the middle of a recession. During the Democratic primary, Senator Clinton suggested rolling back the federal gas tax, which was a pretty bad idea. Ironically, if we still had $4/gallon gas prices today, her ideas might make more sense, except that a temporary reprieve of the relatively small federal gas tax wouldn’t amount to very much. However given petroleum’s relatively low cost right now, rolling back the gas tax temporarily wouldn’t amount to much in the way of meaningful consumer relief. ($31.46 billion on the generous side — an amount in the same ballpark as the recent Citigroup bailout.) When the seas are calmer, then we should discuss nifty tricks like Pigovian taxes and other consumption taxation vehicles as part of a responsible long-term fiscal policy.

Now is not the time to balance the budget. While there will always be arguments over timing, it seems obvious to me that instituting a Pigovian gas tax today — or even this year — isn’t in the US’s, or the world’s best interest. Let’s revisit this idea sometime in 2010. Hopefully by then, we’ll have weathered the worst of this recession.