Referring to the “famous” first two questions of the Republican caucus/conference, they reflect two central questions concerning government involvement in economic recovery.
I am not an economist, but there are a few things about Keynesian theory that I do understand. Briefly, in a recession, when banks are not lending, entrepreneurs are not funding start ups, and consumers are not spending, the government can stimulate the economy by using deficit spending to put money directly into the economy as a whole. Of course, it matters how they inject the money. Deficit spending multiplies the effect of each dollar added to the economy. Across the board tax cuts are not the most effective stimulus.
Across the board tax cuts for the rich, as envisioned by Chris Matthews, are another thing altogether, whatever that phrase might mean.
Bear in mind that Herbert Hoover in 1932 raised taxes (after he had cut them), and attempted to balance the federal budget, two policies that are considered to be the worst things one can do in a recession.
In congressional testimony given in July 2008, Mark Zandi, chief economist for Moody's Economy.com, provided estimates of the one year multiplier effect for several fiscal policy options. The multipliers showed that increased government spending would have more of a multiplier effect than tax cuts. The most effective policy, a temporary increase in food stamps, had an estimated multiplier of 1.73. Making the Bush tax cuts permanent, had the second lowest multiplier, 0.23. A payroll tax holiday had the largest multiplier for tax cuts, 1.29. Refundable lump-sum tax rebates, the policy used in the Economic Stimulus Act of 2008, had the second largest multiplier for a tax cut, 1.26.[2]
It seems clear from this example that the high multiplier effect from food stamps is because food stamps can be used only for consumption. They can’t be invested or hoarded. On the other hand, people that are already consuming as much as they want could use huge tax cuts for investing, which may encourage long term growth, but will not result in an immediate stimulus. They could also send tax cuts to offshore bank accounts, where they will have no effect on our economy.
A payroll tax holiday has an immediate stimulus effect because it puts the money into worker’s paychecks immediately. The effects of tax reductions or credits are delayed because they come into effect the next year. Early filers of refunds can get their money in January, for instance, but not sooner.
One of the biggest criticisms from the tea partiers is that Obama hasn’t done anything to create private sector jobs now. There is little the President, or Congress for that matter, can do to stimulate job growth quickly. The government can authorize large-scale public works, but it takes time to get the contracts written, the companies organized, and workers hired.
The right wing is engaging in doublethink when they accuse Obama of trying to create socialism by hiring more government employees instead of creating private business. I am sick and tired of Republicans claiming they are in favor of small business. Would all Democrats who oppose small businesses please raise their hands?
After watching the Republican-Obama conference I was pretty sure Obama knows about the multiplier effect. The way he answered the questions seemed to indicate that he is aware of current economic theory. However, I think this talk about a spending freeze is pure propaganda. Freezing spending at a defecit level is what you want to do. As noted above, you don’t try to balance the budget during a recession, and you have to engage in deficit spending to gain the multiplier effect. I have no idea if Mike Pence or Paul Ryan know that much about economic theory. Pence seems to dabble in foreign trade for the most part. Ryan, on the other hand, is involved in Ways and Means and Budget. This doesn’t mean he knows diddly about economics, although he should. In fact, all politicians should know these basics and more. It does mean Pence is very influential, however.
In perusing the daily newspaper letters to the editor, it is clear that Americans are abysmally ignorant of how their economy (or their government) works. It’s not their fault. The above concepts are not gibberish to me because I was an econ major, and worked in consumer finance and even on Wall Street. I don’t know if Obama or Olbermann or Maddow could educate people about these theories, but it is difficult for voters to make intelligent political decisions when they don’t have a clear grasp of the issues or the mechanisms involved. Every week I read a letters to the editor explaining that a government budgets are exactly like a household or business budgets, and therefore the government can’t spend more than it takes in. I don’t know about your household budget, but mine lacks the power to tax others, and does not have the right to print money.
That said, I would like an immediate tax credit of $1500.00 for my 2009 taxes, and I am sure most Americans would like the same. We did get the two $250.00 stimulus checks, and an additional $300.00 tax credit, but it wasn’t enough. (Married couples on Social Security got $800.00, $400.00 each).
Should politicians and reporters start talking about the multiplier in public discourse?
I think they should. Hopefully, it would encourage the public to ask relevant questions of their lawmakers, possibly even look up things for themselves, and dispel some of the outright lies we are being fed daily. Of course, our lawmakers and news media prefer the situation the way it is now, where they can lie and mislead with virtually no risk of discovery. Like the radio and TV hosts, they can continue to push our hot buttons to keep us off balance.
Rush has 400,000,000 good reasons to keep up his antics.
Gravymeister, Feb. 4, 2010
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