Talking Points on Stimulus
By Arnold Kling
For Seattle public radio, 10:20 AM Pacific Time today. I will add a link to a recording, probably within the next 24 hours. My main theme is that we should have a small, temporary stimulus, not a permanent shift of power and wealth toward Washington.
[UPDATE: Here is the show. My segment starts about minute 15. I like the fact that the host lets me talk, even when I stammer, without interrupting. At one point, I am called on but someone else answers. No big deal. As far as the stimulus was concerned, there was no one to argue with–the other two panelists did not want a big spending stimulus, either.]1. The economy is in recession, and it would be nice to be able to do something about it. Increasing the government deficit now does long-term damage, but if it helps in the short run we are willing to live with that trade-off.
2. We will never know how much the stimulus helped. We cannot run a controlled experiment where we set up two economies with identical conditions and try different policies. Macroeconomics is not that scientific. Since we cannot even know after the fact, predicting before the fact is highly uncertain.
3. Potential benefit of the stimulus: short-term endure less painful recession in terms of unemployment. Potential costs of the stimulus: incur deficit that has to be paid back; threaten creditworthiness of U.S. Treasury; difficult “exit strategy” if economy becomes dependent on government sector; misallocation of resources because it is hard for so few to spend so much in a way that is wise
4. The larger the stimulus, the greater the risk that costs will exceed benefits.
5. The more the stimulus is focused on spending, the greater the risk that costs will exceed benefits.
6. Profits are in more dire straits than wages.
|National Income Accounts||2007 Q3||2007 Q4||2008 Q1||2008 Q2||2008 Q3|
|Wages and Salaries||6,377.7||6,465.5||6,518.0||6,531.3||6,570.1|
Source: Commerce Department
The upshot is that from the third quarter of 2007 to the third quarter of 2008, wages and salaries increased 3 percent, while corporate profits fell 9 percent. Next month, when we get data for the fourth quarter, we are likely to see wages and salaries looking about flat for the year, with a decline in profits of 20 percent or more.
7. Profits are especially important now, because with the stress in the financial sector it is difficult to raise money. Businesses need profits to fund operations and to stimulate investment and hiring.
8. Business tax cuts can stimulate profits and hiring. One particularly intriguing proposal is to cut the employer contribution to payroll taxes. This would reduce the cost of labor and encourage companies to hire more workers.
9. In contrast, consumer tax cuts are likely to be saved, not spent. Not that saving is a bad thing, but we need to get investment going. Government spending increases will appear in 2010 and later, when we need stimulus as soon as possible.
10. The stimulus proposals are likely to produce a major, permanent redistribution of spending and power away from the private sector and toward government. If we are going to shrink the private sector and expand the public sector, we ought to have an explicit debate about that rather than sneak it in under the guise of “fiscal stimulus.”