While I’m on the subject of thinking outside the box, I wanted to remark on an op-ed by economist Robert Shiller at The New Republic, “Yes, We Can Do Stimulus Without Adding Debt. Here’s How.” The short version of the proposal is that you raise taxes and use the proceeds realized for fiscal stimulus.
Oddly, the cleverest part of Dr. Shiller’s proposal isn’t outlined adequately in the op-ed: if the amount of economic activity that would be produced by the fiscal stimulus exceeds the amount that would be produced in the absence of the tax, the joint policy would, in fact, be stimulative.
However, that’s also the plan’s greatest weakness. If you tax somebody making $10 million a year an additional $1 million and spend the money paying 30 people with zero incomes $30K each, it might produce some fiscal stimulus. Not necessarily. Remember the old adage about not comparing utility functions. However, if you take money away from somebody making $100,000 a year and give it to somebody else already making $100,000 per year, it’s probably a lot less likely that the net result will be economic stimulus. The details matter.
The residual benefit from the infrastructure spending isn’t a done deal, either. How much is the incremental benefit of re-surfacing State Street for the 40th time? Or building yet another bridge across the Mississippi?
IMO a better case can be made for using the additional tax revenue for a federal jobs program for the hardcore unemployed.
Let’s not lose track of the key point of the proposal, though. It’s not just a choice between one thing that’s useless and another that’s valuable. It’s the relative difference in economic activity between the two that’s the key.
Eliminate the mortgage deduction, or cap it. Use half for debt reduction and half for jobs. The hardcore unemployed may be beyond redemption. Concentrate on those unemployed less than a year.
Steve
It implies a greater (positive) “multiplier” for spending than (negatively) for taxing, a credible figure or citation I’ve never see before.
The hardcore unemployed may be beyond redemption. Concentrate on those unemployed less than a year.
Like I said, no more social contract.
See, Tyler Cowen, Why didn’t the stimulus create more jobs?
Takeaways:
My wife said something to me once that I think about now. “Nobody,” she said, “is more unemployable than an unemployed person.” I’d like to think she was wrong in that, but the studies Tyler cites seems to support her.
As you were posting that comment, sam, I was drafting my own new post citing Tyler’s post.
steve,
I don’t see how your proposal would not make a bad situation considerably worse. Eliminating or capping the mortgage deduction will cause real estate values to drop, because it will make houses more expensive to own and therefore cause people to pay less for the houses that they do purchase. The problem now is that a lot of people are “under water” with their mortgages. If you do something that causes the real estate market to take a hit, you are exacerbating that problem.
Also, government spending does not “create” jobs, except at the expense of jobs in the private sector. When you take money from the private sector, whether through taxes or deficit spending that must be paid for with future taxes, you are taking money that generates economic activity in the private sector, thereby creating jobs. When that money is used by government to “create jobs,” two important things happen. First, jobs may, indeed, be created, but fewer jobs are created than would be created in the private sector. Why? Because government uses some of that money for administrative costs (which would not otherwise be present) and because government projects cost more than private ones (e.g., union wages, public procurement laws, etc.), less of the money actually goes toward productive economic activity. Secondly, unless government does an exceptionally good job of planning, which happens rarely, the money will be spent on projects that are less necessary than projects that would be undertaken if the private sector were to do them. Projects undertaken by the private sector put at risk private capital (making the stakes higher) in order to solve problems caused by excess demand for a certain good or service. A project funded by government is much more likely than a privately funded project to be underutilized.