Friday, January 25, 2008

Bad stimulus legislation

If it were feasible to enact and enforce a constitutional ban on fiscal stimulus legislation, I would support it. The problem isn't with the theory of fiscal stimulus, but the practice. For extremely good reasons, it became generally accepted orthodoxy by the late 1980s that efforts to do it would almost always be bad.

Then Clinton won the 1992 election on "it's the economy, stupid," with stimulus legislation as part of his campaign arsenal. Never mind whether Congress enacted the thing in 1993 (it didn't), but a resounding lesson had been learned by politicians across the political spectrum, not least (but not limited to) George W. Bush.

Stimulus legislation is almost always bad because (a) it comes too late, and (b) it becomes a political excuse to throw dollars around to targeted voters, without regard to the actual merits of the policy. In 2001, we got the first supposed stimulus legislation that was actually timely, but this was because Bush had already decided to do it back in 1999 (to fight off Steve Forbes), and calling it stimulus was merely a change in rationale. Even so, the 2001 tax cuts had virtually nothing to do with what actual stimulus legislation would look like. Rather than giving money to poor people who are more inclined to spend it and/or inducing businesses to increase their activity today, its rationale went purely to long-term structural reform of the system (on which grounds there would have been a case for it but for its fiscal unsustainability, although this is a bit like saying there would be a case for taking arsenic to kill stomach tumors except for the side effects).

Anyway, back to the main point. Politicians are now foaming at the mouth to do these things, both as a way of pandering to voters by mailing them checks and to avoid being blamed or looking like they don't care. The fact that Bush and the Democrats agreed to make a deal on this shows how hungry they are to do something, given how they usually interact.

So what they're doing, the investment incentives aside, is mailing people a bunch of checks several months from now, when it will be too late if there actually is a recession. Why not wait a few months until October, for perfect pre-election timing? Although the Democrats got a small concession or two from Bush on the distribution of the tax cut, it will still be going to people who in general are probably unlikely to spend much more at the margin by reason of getting these little one-time checks.

Does anyone want to offer a guess on whether they will rescind the check-writing program if it turns out by June that we don't have a recession after all?

And what is this foolishness about how it should be styled a tax rebate and hence linked to taxes actually paid? That has zero connection with the stimulus theory, which is that you disburse the money based on marginal propensity to spend it. Plus this is supposedly a one-time, unexpected, ex post adjustment that people weren't supposed to anticipate or see as likely to recur. We don't retroactively encourage more economic activity in 2007 by mailing back a check in June 2008 that is a bit higher if you paid more tax back then. And if we do, because people anticipate that this will happen again, then we are imposing higher marginal rates via the phase-out as 2007 taxable income rises.

What about the fact that, because the government takes in cash and pays out a mix of cash and goods or services, just about everyone in the society pays a positive lifetime net tax? Would it really be a tax rebate if we gave more money to someone who paid zero in 2007 but styled it either an ex post rebate of taxes paid ten years ago or an ex ante rebate of taxes to be paid ten years from now? Why not? Money is fungible.

A truly pathetic performance out of Washington, and not in the least bit surprisingly so.

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