There has been significant talk about the Obama fiscal package but there has been very little discussion on the economics of the package other than it has to be be big, very big. Some of have stated that the tax cuts associated with the package are necessary to have the Republicans follow along on passage but no one has asked the important question on what will have the biggest bang for the buck. We know that the temporary tax cut of second quarter of 2008 did not have much of an impact but that could because of its temporary nature.
N Greg Mankiw provides an interesting perspective on the package in the NYT which should cause food for thought. http://www.nytimes.com/2009/01/11/business/economy/11view.html?_r=1&ref=business. He presents the evidence that the multiplier effect of a tax cut may be much greater than what would occur from just increasing government expenditures. In fact, the positive effect of tax cuts is something that can occur immediately while any increase in fiscal spending will take some time and may be subject to waste. So there is a choice. We could provide tax relief to individuals and businesses which will have an immediate effect and allow the taxpayer to make the decision on how best to spend the money or we could have the government spend the money on what it thinks the country needs.
The use of fiscal spending is an important tool and this is a rare chance to change the mix of spending to enhance infrastructure, but a tax cut is not a bone thrown to Republicans but an effective means of getting a strong multiplier effect. The CEA appointee Christina Romer has shown the important impact of tax cuts, so we only hope that President-elect Obama and Romer can carry the day with the economic evidence.
N Greg Mankiw provides an interesting perspective on the package in the NYT which should cause food for thought. http://www.nytimes.com/2009/01/11/business/economy/11view.html?_r=1&ref=business. He presents the evidence that the multiplier effect of a tax cut may be much greater than what would occur from just increasing government expenditures. In fact, the positive effect of tax cuts is something that can occur immediately while any increase in fiscal spending will take some time and may be subject to waste. So there is a choice. We could provide tax relief to individuals and businesses which will have an immediate effect and allow the taxpayer to make the decision on how best to spend the money or we could have the government spend the money on what it thinks the country needs.
The use of fiscal spending is an important tool and this is a rare chance to change the mix of spending to enhance infrastructure, but a tax cut is not a bone thrown to Republicans but an effective means of getting a strong multiplier effect. The CEA appointee Christina Romer has shown the important impact of tax cuts, so we only hope that President-elect Obama and Romer can carry the day with the economic evidence.
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