Sunday, January 11, 2009

The O's Serious Stimulus Shenanigans

Of course, the O team produced a "report" which tells us all about the benefits of the O plan.

Not that the report actually makes sense, mind you...but hey! The MSM bought it.

Fortunately, Cianfrotta at RedState offers a quick analysis.

...The report acknowledges tax cuts to be of stimulative value only if they’re permanent. So to finesse the fact that none of Obama’s proposed tax cuts are actually permanent, the authors simply assume that they are.

...Tax cuts produce no direct stimulative effect because, the authors assert without explanation, people tend to save them rather than spend them. Of course, as I said, the report assumes that money that people receive in income tends to be spent rather than saved. This is a terrific flaw in the methodology.

...There’s an implicit assumption that this recession does not feature a fundamental change in the pattern of consumer demand, and this is an enormous error.

(That change being towards savings and away from consumption...)

...Without very significant and permanent cuts in marginal tax rates on business and capital, which this plan does NOT propose, the whole adventure has the potential to produce massive inflation rather than stimulus.

And the authors breeze right past this fact when they note that their estimates assume that the Fed will continue its zero-interest rate policy rather than raising rates, as is normally done (to counteract inflation!) in times of fiscal stimulus.

The Fed very well MIGHT not increase rates. But bond-buyers will. If PRC doesn't think the value of the USD will hold up, they will purchase US T-Bonds at a larger discount, effectively raising the interest rate paid on the note. The Fed's policy can be irrelevant. increase in GDP necessarily produces a particular decrease in the rate of unemployment. They’re assuming that a 1% increase in GDP (the stimulus amount times a 1.5 multiplier) will create 1 million jobs. They don’t show their calculations, but the back of my envelope and a standard interpretation of Okun’s Rule suggests that they’re overstating the effect by anywhere from 1.5 to 2.5

(Or maybe 3.0, 4.0, or 9.0, as we note from Eggster's blog-entry of today. This is becoming "pick a number, any number" economics....)

1 comment:

Deekaman said...

No shock here. You don't even have to go back as far as FDR to see that this only prolongs the agony. Nixon's "tax rebate" did nothing to stave off "stagflation". One-time taxx cuts, rebate checks and the like do not serve any significant stimulative purpose. It only makes people feel better. A one-time check helps you for a month. Permanent Reagan-esque tax rate cuts help you for as long as the cut lasts.

Get ready for a really long downturn.