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January 15, 2008
Q: Is a rebate check the quickest and most effective fiscal stimulus?
Probably not.
But consider the following. Brad DeLong writes:
Bear in mind that I don't yet believe that the case for a fiscal stimulus is strong--although I may change my mind in a month or two, depending on how the data flow looks. The principal organization for successful stabilization policy is the Federal Reserve. Congress and the president have a role to play only in two situations: first, if monetary policy has shot its bolt and cannot do anything more--and we are far from that point--and second, if the Federal Reserve has been caught flat-footed in the wrong policy position, unemployment is rising rapidly, and it is important to get cash quickly into the hands of people who will spend it and so keep the rise in unemployment from being as large. We are not there yet--at least I don't think so--but we may be there in three months.
From this perspective Obama's plan looks pretty good:
Obama stimulus package emphasizes quick cash in hand: a $250 tax credit to 150 million workers to offset the payroll tax paid on the first $8,100 of earnings. He urged a further $250 tax credit per worker if employment declines three months in a row. He also would give a one-time, $250 payment to Social Security recipients who would not benefit from the tax credit, followed by another $250 payment if employment declines three months straight. The immediate relief would cost $45 billion, plus another $45 billion if the economy weakened...
...
John Edwards's and Hillary Rodham Clinton's plans look, to me, likely to be less effective. Consider Hillary Rodham Clinton's:
Talking Points Memo | Clinton offers economic stimulus plan: a $30 billion housing crisis fund to help states and localities deal with the fallout of foreclosures... ease the effects of vacant properties with anti-blight programs and helping local housing authorities buy and rent out vacant properties. Setting a 90-day moratorium on subprime mortgages of at least five years, or until housing lenders have converted mortgages into loans families can afford. The proposal also would increase the portfolio caps at Fannie Mae and Freddie Mac. Providing $25 billion in emergency energy assistance for families facing rising heating bills.... Providing $10 billion to extend unemployment insurance for those struggling to find work while supporting families. Providing $5 billion in energy efficiency by doing such things as giving tax credits to encourage purchases of low emission vehicles and efficient appliances windows and other clean technologies. She also proposes funds to train and put to work people making public buildings more energy efficient...
These are all worthy causes--things that the government should be spending more money on. But this is not a bill that can be passed quickly--the housing provisions, at least, are one of those things where the devil is in the details of the drafting and where quick, clean passage and implementation is almost impossible. Funds to train and put to work people making public buildings more energy efficient--well, those aren't timely. The proposal is not Obama's: we are going to stimulate demand by cutting a lot of identical checks via a refundable tax credit--a thing that the government can do well and quickly....
...
John Edwards and Hillary Rodham Clinton and their staffs--they don't seem to have grasped that governance is best when you ask congress to do things that are within its competence, and ask the administrative branch to do things that are within its competence. They might respond that these stimulus packages are political rather than policy documents--acts of campaigning rather than acts of governance--and they are right, up to a point.
And so my question: Is a rebate check the quickest and most effective fiscal stimulus? It would seem that there is an argument to be made that it is better than many other alternatives. This document from the CBO circulating through the blogosphere gives rebate checks a mixed review. Their report gives the best rating to extensions of unemployment insurance and increasing food stamp benefits. King Banaian is skeptical given that long term unemployment doesn't seem to be our biggest problem. I concur. If indeed we are turning toward recession, then I'd fire the first salvo from the monetary cannon rather than the fiscal one.
There are other problems with the idea of rebates as stimulus. Unless they are coupled with long term tax reductions there is a risk that they will be nothing more than an illustration of the permanent income hypothesis at work. It is unclear that the money would be spent, especially if the rebates are broad-based rather than targeted--and the broad-based ones are the most efficient put into play.
That said, the more complex proposals of Clinton and Edwards would certainly take longer to get through congress. And that's going to be the biggest problem of all.
Menzie Chinn has much more at Econbrowser.
Posted by William Polley at January 15, 2008 5:35 PM
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Comments
Isn't this what is done in Zimbabwe? i.e. print money and then just throw it out there. How is that working for them?
Is Dr. Bernanke really going to earn his Helicopter Ben nickname?
Posted by: Lee at January 15, 2008 7:11 PM