Posted by Sir Four at 3:43pm Jan 9 '09There is a debate afoot over how best to stimulate the economy. The Right tends to argue for tax cuts (put more money in people's hands so they'll spend it), while the Left tends to argue for job creation (put people to work on infrastructure and other projects).
To me, the logic of the latter approach trumps the former. For tax cuts to help, a few things need to happen. People have to take that tax break and spend it, and that spending has to compel the private sector to hire more workers to meet an increase in demand. However most economists agree that last year's tax rebate was a bust--on an individual level it didn't amount to much, and most people either saved it or paid down debt. Those are good actions, but not the type that will stimulate the economy. Now here we are in 2009 with even worse consumer confidence, meaning people are even more likely now than before to save or pay down debt rather than spend a tax cut.
Another objection to a tax cut is that by definition it only puts money in the hands of people with jobs. It doesn't directly help anyone out of work.
Let's say the government plans to use $500 billion for stimulus (just to pick an arbitrary number). If it goes the tax cut route, it is out $500 billion with nothing to show for it, and we're crossing our fingers that it will help. If it goes toward putting the unemployed or under-employed to work on various projects related to infrastructure and energy efficiency, in the very worst case (that is, it fails to stimulate economic recovery) at least you end up with tangible improvements (the fruits of the projects) and people who would have otherwise been out of work and receiving unemployment benefits or welfare had a job instead. The money that they earn from the projects would circulate into the economy every bit as much as--and likely more than--the whole tax cut idea. So that part still happens.
So how is the job creation idea not superior to the tax cut idea? At the end of the day, I think what it comes down to is some conservatives would rather eat their hat than see the government engage in any New Deal style projects. For purely ideological reasons.
To me, the logic of the latter approach trumps the former. For tax cuts to help, a few things need to happen. People have to take that tax break and spend it, and that spending has to compel the private sector to hire more workers to meet an increase in demand. However most economists agree that last year's tax rebate was a bust--on an individual level it didn't amount to much, and most people either saved it or paid down debt. Those are good actions, but not the type that will stimulate the economy. Now here we are in 2009 with even worse consumer confidence, meaning people are even more likely now than before to save or pay down debt rather than spend a tax cut.
Another objection to a tax cut is that by definition it only puts money in the hands of people with jobs. It doesn't directly help anyone out of work.
Let's say the government plans to use $500 billion for stimulus (just to pick an arbitrary number). If it goes the tax cut route, it is out $500 billion with nothing to show for it, and we're crossing our fingers that it will help. If it goes toward putting the unemployed or under-employed to work on various projects related to infrastructure and energy efficiency, in the very worst case (that is, it fails to stimulate economic recovery) at least you end up with tangible improvements (the fruits of the projects) and people who would have otherwise been out of work and receiving unemployment benefits or welfare had a job instead. The money that they earn from the projects would circulate into the economy every bit as much as--and likely more than--the whole tax cut idea. So that part still happens.
So how is the job creation idea not superior to the tax cut idea? At the end of the day, I think what it comes down to is some conservatives would rather eat their hat than see the government engage in any New Deal style projects. For purely ideological reasons.
Tax Cuts vs. Direct Job Creation - Sir Four