I considered appending this to the last post as an update, but decided it was already long enough. This will be brief.
Tomorrow's NY Times has an article on the disagreement among economists about how best to implement fiscal stimulus. The usual arguments against it have been hashed out already. But here's a defense of timely stimulus from John Taylor.
Stimulus packages of the less recent past are often cited as examples of how not to make policy. Economists say that in the recession of the mid-1970s, spending and tax cut measures were enacted too slowly, having an effect only after the economy had already picked up. In 1992 and 1993, partisan squabbling derailed plans for a stimulus package as the recession came and went.
The measures seven years ago sent a different lesson, according to John B. Taylor, a professor of economics at Stanford and a former Treasury official under Mr. Bush. “People look back at 2001 and are more positive about this kind of approach,” he added.
Taylor's point, which is present in his textbook and which he reiterated in a Bloomberg podcast with Tom Keene, is that timing is everything. However, in the podcast, Taylor reminds us that the 2001 rebate was actually an advance payment on the cut in tax rates (that are set to expire soon). In that way it was different from what is being proposed now.
In my opinion, that is a pretty big difference, and leads me to the view that the rebates being proposed now will be less effective than those in 2001.
Listen to the podcast with Taylor. He has some interesting comments on monetary policy as well. "Bloomberg On the Economy" is a good thing to have on in the background while you're blogging.
you may want to look at this:
http://www.nber.org/papers/w13694
The Reaction of Consumer Spending and Debt to Tax Rebates -- Evidence from Consumer Credit Data
Sumit Agarwal, Chunlin Liu, Nicholas S. Souleles
NBER Working Paper No. 13694
Issued in December 2007
NBER Program(s): EFG PE
---- Abstract -----
We use a new panel dataset of credit card accounts to analyze how consumers responded to the 2001 Federal income tax rebates. We estimate the monthly response of credit card payments, spending, and debt, exploiting the unique, randomized timing of the rebate disbursement. We find that, on average, consumers initially saved some of the rebate, by increasing their credit card payments and thereby paying down debt. But soon afterwards their spending increased, counter to the canonical Permanent-Income model. Spending rose most for consumers who were initially most likely to be liquidity constrained, whereas debt declined most (so saving rose most) for unconstrained consumers. More generally, the results suggest that there can be important dynamics in consumers' response to "lumpy" increases in income like tax rebates, working in part through balance sheet (liquidity) mechanisms.
To the surprise, therefore, of no one who thought about it (and I'm certain that group includes spencer), those who could view it as a deferred tax liability saved for the day that liability came due, while those whose income is less than subsistence (c[0], if you prefer) had no such luxury.
How much does NBER pay for such profundity to be gatekeepered?
Economic Malady – Stimulus Insufficient
The underlying problem with the economy is an extreme maldistribution of income between the working class and the capital owners. When a CEO can make 300 million dollars while an average worker's wages haven't even kept pace with inflation what results is a dysfunctional market economy starved for consumption spending. The average American has had to fuel his/her spending with debt obtained by borrowing on the equity within their home - that phantom equity has now evaporated.
In order to correct this out of balance condition there needs to be laws in place (similar to the anti-Trust legislation) that caps the annual income of all capital owners and their surrogates (CEOs, CFOs, etc.) at a specific federal percentage above that of the highest paid worker within their respective firm. Also, we need to eliminate labor arbitrage by canceling all Temporary Worker Visa programs (L-1, H1-B, etc.), and establish tax penalties for firms that expand their workforce above some threshold through outsourcing, or replacement hiring in foreign locations.
Essentially, FDR was accurate when he characterized the Great Depression as an out-of-balance Economic malady. Rural income prior to the Great Depression was significantly lower than urban income, now (overvalued home equity) as then there was unlimited amounts of overvalued phantom equity flowing into the stock market, the income differential between labor and capital while nowhere near the current astronomical level was still much higher than sustainable. There in lies the root cause of the out-of-balance condition that precipitated the Great Depression. Any system including the market economy that gets to far out balance does not function properly. Certain constraints need to exist to keep the market economy from slipping into a dysfunctional state. Balance is the essence of stability nothing short of this will guarantee permanence.
John Maynard Keynes –
If fiscal policy is used as a deliberate instrument for the more equal distribution of incomes its effects in increasing the propensity to consume is, of course, all the greater.
Aggregate consumption depends mainly on the amount of aggregate income.
Consumption – to repeat the obvious is the sole end and object of all economic activity.
We cannot, as a community, provide for future consumption by financial expediants [stocks, bonds, 2nd mortgages on home loans, etc] but only by current output.
Capital is not a self-subsistent entity existing apart from consumption.
Consumption is directly tied to the level of employment.
My Proposed Program
• 2 year 800 billion emergency Infrastructure Investment Jobs Creation Program (IIJCP) aimed at building new interstate highways, mass transit systems, schools, bridges, public hospitals, libraries, and assorted public buildings.
• Eliminate labor arbitrage by canceling all Temporary Worker Visa programs (L-1, H1-B, etc.), and establish tax penalties for firms that expand their workforce above some threshold through outsourcing, or replacement hiring in foreign locations.
• Taxation of corporate profits in the amount of 95% for firms that exceed a threshold level of jobs outsourced to a foreign country.
• Taxation at the rate of 80% on individual yearly income received from any corporation, not-for-profit organization, or any form of legal entity where the total income exceeds the U.S. average yearly median individual income by 200%.
• Fair trade agreements that ensure nations will offer decent wages, humane working conditions, and sound environmental policies.
• A nationalized health care system for all U.S. citizens.
• An effective federally funded tuition assistance program for U.S. citizens targeted at professions in demand.
• Repeal all legislation that inhibits the right’s of individuals to organize under labor unions regardless of position or any other currently disqualifying classification.
My Observations:
• An economy can only function when a large proportion of the populace is engaged in the economy thus able to purchase what is produced.
• If price is inelastic and labor remuneration static demand will fall due to reductions by industries in their capital base (the most important being labor).
• Firms forced to compete (those that are not oligopolies) in an economic environment where demand is declining will still compete on price but efficiency gains and operating cost reductions by nature have marginal declining utility whereby a point is reached when the firm's factors of production (land, labor, or capital) must be slashed. These cuts in factors of production will have a multiplicative effect throughout an economy resulting in an ever building 'wave' of economic decline.
• It is important to keep in mind that an economy cannot continue to grow when long-term consumption continues to decline. This in turn ties directly to reductions in the factors of production to accommodate continual long-term reductions in consumption.
• When geographical barriers, constraints to the free flow of labor resources, underemployed resource utilization, similar knowledge distribution across all nation state’s, and nation state governmental inconsistency exists no global free market can exist and thereby at the nation state level no significant corresponding opportunity cost for engaging in one form of economic endeavor over another.