Stimulus Reality: Spending Creates VASTLY More Jobs Than Tax Cuts (Paul Rosenberg)

http://www.openleft.com/showDiary.do?diaryId=11354

Mark Zandi s Chief Economist and co-founder of Moody’s Economy.com, where he directs the company’s research and consulting activities.  His analysis “The Economic Impact of the American Recovery and Reinvestment Act, Mark Zandi – January 21, 2009” [pdf] contains the following chart showing the relative efficacy (“bang for the buck”) of different categories of tax cuts and spending measures.  As can be seen, the spending measures deliver considerable more bang–particularly compared to the GOP favorites, such as making Bush Tax cuts permanent:On the flip, I present an expanded version that adds information about how these differences translate into GDP and jobs, plus a snippet of commentary from Zandi.

Paul Rosenberg :: Stimulus Reality: Spending Creates VASTLY More Jobs Than Tax Cuts

Drawing on figures from Dean Baker, co-director of the Center for Economic Policy and Research, in “Spending Versus Tax Cuts: Who Pays the Cost of Political Compromise?” [pdf], I’ve expanded Zandi’s table As you can see, the only tax cuts that perform respectably are the refundable rebates and the payroll tax holiday–that’s because unlike any of the others, they primarily benefit people of very limited means who will spend whatever money they get.  The others will just go to people who will either pay down debt or buy another jet. In his analysis, Zandi says:   Income supportThe House stimulus plan includes some $100 billion over two years in income support for those households under significant financial pressure. This includes extra benefits for workers who exhaust their regular 26 weeks of unemployment insurance benefits; expanded food stamp payments; and help meeting COBRA payments for unemployed workers trying to hold onto their health insurance. Increased income support has been part of the federal response to most recessions, and for good reason: It is the most efficient way to prime the economy’s pump. Simulations of the Moody’s Economy.com macroeconomic model show that every dollar spent on UI benefits generates an estimated $1.63 in near-term GDP.x Boosting food stamp payments by $1 increases GDP by $1.73 (see Table 2). People who receive these benefits are hard pressed and will spend any financial aid they receive very quickly. Another advantage is that these programs are already operating and can quickly deliver a benefit increase to recipients. The virtue of extending UI benefits goes beyond simply providing aid for the jobless to more broadly shoring up household confidence. Nothing is more psychologically debilitating, even to those still employed, than watching unemployed friends and relatives lose their sources of support.xi Increasing food stamp benefits has the added virtue of helping people ineligible for UI such as part-time workers. Aid to state and local governments Another potent tool included in the House stimulus plan consists of some $200 billion in aid to state and local governments over two years. This takes the form of a temporary increase in the Medicaid matching rate to ease the costs of healthcare coverage; help to local school districts; and broader fiscal relief to states to prevent cuts in key programs. More than 40 states and a rapidly increasing number of localities are grappling with significant fiscal problems. Tax revenue growth has slowed as home sales, property values, retail sales and corporate profits have all fallen. Personal income tax receipts have begun to suffer as the job market slumps. Big states including California and Florida are under severe financial pressure, and smaller states including Arizona, Minnesota and Maryland are struggling significantly. The gap between state and local government revenues and expenditures ballooned to over $100 billion-a record-in the third quarter of 2008, according to the Bureau of Economic Analysis. Not surprisingly: (1) The Republicans don’t have a leg to stand on. (2) Even with control of both houses of Congress and the bully pulpit of the presidency, the Democrats haven’t managed to make this clear to the American people.