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February 02, 2009

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Fyi: absent some radical change in the stimulus package -- including, God forbid, that someone actually listens to me -- or a need to respond to a critic, I intend this post to be my last one on this subject.

Gimme a P

"P"

I have to say that my anticipation while waiting to see how those comments turned out rivals what I'm currently experiencing waiting for the next BSG episode.

von, since this may be your last post on the subject, would you finally explain why tax cuts provides an immediate jolt when a: they are not all that quick and b: the likelihood is that less than 30% of the money coming in to families is likely to actually be spent/

Your link does not talk about tax cuts, but rather tax credits very narrowly targeted to home and vehicle buyers. I am not against those per se, as they do address an important part of the economy and are endorsed by some Dem Senators such as Conrad.

But you keep calling for more tax cuts without saying how the heck they are supposed to help.

Football season is over. So is ONTT/Rick's Nuts/TSW's ability to post, until such time as he emails the kitty to get posting privelege back.

Completely unnecessary and juvenile. Time to grow up, troll.

WARNING:

DO NOT CLICK ON THE TROLLS' MONIKER -- ESPECIALLY IF YOU HAD A HEAVY BREAKFAST, WHICH, THANKFULLY, I DID NOT.

Sorry, I'd meant to fix that, too. Fixed.

Apparently, someone has just discovered the Internet. How long has that goatse thing been floating around, now? A decade?

Thanks for the trip down memory lane.

Back in my day, when you got rickrolled you didn't wind up with a vapid and catchy tune stuck in your head. You wound up with the dark heart of humanity etched onto your retina.

"von, since this may be your last post on the subject, would you finally explain why tax cuts provides an immediate jolt when a: they are not all that quick and b: the likelihood is that less than 30% of the money coming in to families is likely to actually be spent"

Umm, they're pretty fast. They can be about 90% out the door by April 15 which is 2.5 months away. As opposed to the infrastructure stuff which appears to be about 24 months away (the report says that about 2/3 of the 'stimulus' will be spent by the end of 2010, but that counts the tax cuts and unemployment benefits.) I'm not sure what you are comparing to to get 'not that quick'.

"the likelihood is that less than 30% of the money coming in to families is likely to actually be spent"

Don't know where you get that figure. I expect it will be much higher in bad economic times (save money or spend it instead of being homeless, I know what most people would choose). And even if it were, you have to compare it to a similar question in infrastructure spending. For stimulus purposes the question is something like "how much of this spending is creating new jobs starting about 2 years from now rather than diverting these people from other area of the economy". I don't think I've seen a good estimate of that because the question doesn't get explicitly addressed very often (the assumption from boosters appears to be either the almost certainly wrong 'nearly all' or the probably wrong 'most' or the quite possibly wrong 'a clear majority')

I expect it will be much higher in bad economic times (save money or spend it instead of being homeless, I know what most people would choose).

It appears people are choosing save it:

WASHINGTON – Consumer spending fell for a record sixth straight month in December as recession-battered households, worried about surging layoffs, boosted their savings rates to the highest level since May.
...
Still, Americans worried about the possibility of more job cuts boosted their savings rate to 3.6 percent of their after-tax incomes in December. That was the highest level since tax rebate checks temporarily pushed the rate up to 4.8 percent in May.

"(save money or spend it instead of being homeless, I know what most people would choose)."

Thank you for making my point for me. They don't avoid homelessness by spending the money, they avoid homelessness by paying down their debt or applying it to their mortgage payments, neither of which provides much of a stimulus.

As to the 30%, that is what has been estimated as actually spent from the last round, and the personal debt was even less then. Since I am at work it will take me awhile to come up with cites, but I will.

I'd put it toward my mortgage principal, just like I'm doing with every other spare cent of income.

[Harvey Feierstein]Is that so wrong?[/Harvey Feierstein]

John -

I'd echo Sebastian's comments, and further point out that there really isn't a salient distinction between cuts and credits here, save that a refundable tax credit is sometimes preferred when you want to provide money to very low income individuals (as is the case here).

Also, the credits under consideration include very broad credits that will go to the vast majority of families. They aren't just targeted credits as you describe.

Ugh's comments about the savings rate are not surprising: That's what happens in a recession. An increase in the savings rate is not necessarily a bad thing, long term, and may also have an impact on the supply side. But keep in mind that not, like spending, not all tax cuts and credits are created equal. Some give more bang for the buck than others.

As a practical matter, the highest impact tax cuts/credits tend to be those that go to companies and reward short-term behavior. That's because companies generally more sophisticated than the average tax payer and are much more likely to use an appropriate tax cut or credit for creating jobs, saving jobs, purchases, investment, etc. than an individual will.

"Thank you for making my point for me. They don't avoid homelessness by spending the money, they avoid homelessness by paying down their debt or applying it to their mortgage payments, neither of which provides much of a stimulus."

They don't typically avoid it by paying down debt except perhaps AS mortgage payments so there seems to be some confusion in your framing. Where did you get that 30% number? I'd like to be able to see what it is talking about.

And what did you mean by 'not all that quick'?

And what about infrastructure projects diverting jobs?

Your argument appears to be "Tax cuts are worse than infrastructure projects as stimulus because tax cuts aren't all that quick, and aren't perfectly effective". Which at least partially breaks down when you try to translate it to "aren't all that quick (compared to infrastructure spending)" and "aren't perfectly effective (compared to infrastrucutre spending)".

And by the way, vons argument isn't just about tax cuts. It is about the fast spending, so tax cuts, increased unemployment benefits, food stamps and the like.

We are arguing over the details of how the deck chairs should be reshuffled here. A true Keynesian stimulus large enough to stop the current downturn would have to be at least 4-5 times larger than the stimulus bill working through Congress.

We can't afford anything remotely that large because the US is a net debtor nation not a net creditor nation as we were in the 1930s, a fact which was made pretty clear if you read between the lines of what was said at Davos.

I'm not convinced that any of the politically likely alternatives to this stimulus bill would differ dramatically from it in either speed or multiplier. The real political focus now should be on killing off the "Bad Bank" plan per the next thread over (Eric's "...And I Will Advertise It").

"They can be about 90% out the door by April 15 which is 2.5 months away."

Sebastian's mention of April 15 made me think of a possible lift to the economy that won't even be in the Stimulus Plan.

Traditionally, we see a good number of folks using their tax returns on down payments -- or payment in full for really cheap cars.

Just last week, I had two customers who could not buy on the spot because they said they had to "wait for their tax money." These customers often have challenged credit.

I'm thinking (and hoping) this could especially be the case this spring since so many would-be buyers have been putting off big purchases due to recessionary fears -- as an economist I read last week noted, sooner or later, everyone who has been putting off a car purchase are going to come back to the market. I forget the exact figure but the article said the number of cars put out to pasture each year in this country is in the millions (which, for some reason, surprised me).

Also, I know people who say they are waiting for that check from Uncle Sam to buy the laptop, etc., they have been eyeing.

P.S. If you are in the market for a car or truck and have an older trade, say, circa, 1995-2000 -- the type of cars a decent-size dealership like mine will wholesale to the buy-here-pay-here guys -- try and squeeze out a few more bucks. Up until April 15, said wholesalers usually pay a little more for such vehicles due to increased demand.

We are arguing over the details of how the deck chairs should be reshuffled here. A true Keynesian stimulus large enough to stop the current downturn would have to be at least 4-5 times larger than the stimulus bill working through Congress.

If that's your view, why do anything?


von,

Tax cuts, like bridges, tend to hang around for a long time. Any tax cut you can justify as a quick stimulus will be hard to reverse once the need for stimulus passes. The 2001 Bush tax cuts were (in the end) sold as stimulus, they were passed with sunset provisions, and the GOP has been caterwauling ever since that allowing them to expire is a huge tax increase.

You want fast stimulus? Hand out the trillion dollars in the form of a $10,000 pre-paid debit card to each household in the US. No fuss, no muss, no restrictions on how the cards are used.

Either that's big enough and bold enough, or it isn't. I don't know, and you don't either. But I do suspect we have a difference of opinion over the "fairness" of such a plan, quite apart from its bigness or boldness.

--TP

"Savings" in the form of paying down consumer debt will be a minor short-term depressive factor, in that the credit suppliers won't rake in as much in fees and usury -- but if paying down now prevents a significant fraction of defaults in the next 2 years, it may save those same companies from collapsing like a tower hit by a plane. The real question for 2009 is whether consumer debt-based securities are going to crash. It would be nice to avoid that, as wheelbarrows full of currency are so difficult to steer to bakeries.

I still think we should exercise eminent domain over the excess housing stock built in the last few years, and then blow it up. This will bring supply back in line with demand and make the value of the mortgage-backed securities much easier to determine. The free market can handle it from there.

Better yet, we could grab 'em, swap 'em even for Section 8 tenements, and blow up the tenements.

(My plan is also good b/c it provides nifty fireworks.)

Before you ridicule, consider whether this is any sillier than paying farmers not to grow crops.

If that's your view, why do anything?

To make it hurt less on the way down.

Wile E Coyote is falling off a cliff. He needs a mattress to land on and a crash-helmet to wear when the (currently levitating) broken off chunk of rock falls on his head. That's about all we can afford, there isn't enough in the budget for a parachute or a hang-glider.

In other words, in my view the stimulus is needed to cushion the downturn both this year and thru 2010/2011. I wish we could afford a larger one, but IMHO we can't. I think Obama's team is already flirting with the limits of what we can borrow, as I've commented on in detail in prior Stimulus threads here.

Given those constraints, I think they are aiming to get both speed (the tax cuts and transfer payments) and multiplier (the infrastructure projects) out of the same bill. I don't think they can get much more in the way of speed without sacrificing multiplier, and visa-versa. I think this bill isn't perfect, but I see little room for drastic improvements in either direction without giving up on one or the other of speed & multplier, and we need both.

I do think that from a policy standpoint we should have a much larger spending bill later this year to address both transportation and energy infrastructure, but I think it will have to be paid for with tax increases, not deficit financing. The key constraint on the latter will be how the market for Treasuries reacts - if rates start to climb by more than a few hundred basis points then we've reached the end of our rope with regard to borrowing.

we need to figure out what we can make that the rest of the world would want to buy. our economy is bad i feel as if i am on Tax Payer Life Support

Before you ridicule, consider whether this is any sillier than paying farmers not to grow crops.

IIRC there are sound reasons to pay farmers not to grow crops, if done correctly.

von,

What about direct aid to states to make up budget shortfalls which are leading states to cut jobs? And things like budget assistance to transit authorities, all sorts of things that are hit by the recession right when they're most needed? They save and create jobs, and kick in as soon as the money's there, and will definitely be spent, mostly on keeping or rehiring people? Would you put those in A or B?

TLTIA: We are arguing over the details of how the deck chairs should be reshuffled here. A true Keynesian stimulus large enough to stop the current downturn would have to be at least 4-5 times larger than the stimulus bill working through Congress.

von: If that's your view, why do anything?

Even if we can't stop the current downturn, there are things we can do to lay the groundwork for a better recovery. I vote for new wires, trains and intertubes.

"IIRC there are sound reasons to pay farmers not to grow crops, if done correctly."

I'm pretty sure you don't recall correctly, unless "if done correctly" doesn't include the actual practices of farm policy in the United States over the past 50 years.

Seb - a government program that as originally envisioned had a sound basis in policy and yet morphed into a giant boondoggle completely divorced from its original rationale? You don't say.

Tax cuts, like bridges, tend to hang around for a long time.

That's true of any government program, including spending programs and especially expansions of government agencies, because each agency is, at heart, its own private lobbying group. But the only way to do strimulus quick is to us tax cuts, credits and refunds -- so that's what you do.

By the way, the Bush tax cuts were always proposed as a permanent solution, even though they only were passed as a supposed temporary solution.

What about direct aid to states to make up budget shortfalls which are leading states to cut jobs?

Some of this is in Division A and some of this is in Division B, because a number of shortfalls are in state direct payment programs. Because many of the state programs in Division A are longer term, I see no harm in debating those programs for an additional month.

Hey Von,

The final CBO report came out and said 78% of the bill would have impact in the first 2 years.

So I eagerly await part 6 telling us why their analysis contradicts yours.

"Seb - a government program that as originally envisioned had a sound basis in policy and yet morphed into a giant boondoggle completely divorced from its original rationale? You don't say."

Sure, but as far as I know farm subsidies never had a sound rationale. ;)

Seb,

IIRC the "sound rationale" behind farm subsidies was that agricultural products were subject to a procyclic feedback loop with regard to acreage planting decisions at the level of individual farms (a farmer with a fixed debt service load has to plant more when prices fall if they wish to sustain an income level sufficient to continue servicing their debt), which made prices very volatile, thus harming both producers and consumers. The subsidies were intended to smooth out those swings in price.

This rationale may be obsolete due to the disappearance of the family farm and its replacement by mega-agribusinesses, and/or misserved by making farm subsidies permanent rather than conditional. I also wonder if it would have been better to regulate the maximum debt levels which farmers could take on, since this seems like yet another example of the destructive power of leverage, which keeps coming back to haunt us.

But the only way to do strimulus quick is to us tax cuts, credits and refunds -- so that's what you do.

Well, yes, I understand that's your position, von. So, taking your position at face value, I ask again: Suppose we send out a pre-paid debit card worth $10,000 to every household in the US. That's one way to implement a trillion-dollar stimulus right quick. Do you think this approach would be better or worse than the "stimulus package" you seem unhappy with?

Note that I'm not asking you to endorse the idea. I'm only asking you to rank-order two particular options out of the whole range of possible options.

--TP

"IIRC the "sound rationale" behind farm subsidies was that agricultural products were subject to a procyclic feedback loop with regard to acreage planting decisions at the level of individual farms (a farmer with a fixed debt service load has to plant more when prices fall if they wish to sustain an income level sufficient to continue servicing their debt), which made prices very volatile, thus harming both producers and consumers. The subsidies were intended to smooth out those swings in price."

Farmers Insurance. There is a reason they have that name by the way.

"Suppose we send out a pre-paid debit card worth $10,000 to every household in the US. That's one way to implement a trillion-dollar stimulus right quick. Do you think this approach would be better or worse than the "stimulus package" you seem unhappy with?"

I'm not von, but I would say almost certainly 'better' than the not-until-end-of-2010 part of the current stimulus package.

I ask again: Suppose we send out a pre-paid debit card worth $10,000 to every household in the US. That's one way to implement a trillion-dollar stimulus right quick. Do you think this approach would be better or worse than the "stimulus package" you seem unhappy with?

In terms of stimulating the economy in the short run? Clearly better.

In terms of making long-term changes to infrastructure that private actors are unable to implement? Not as good.

As a practical matter, the highest impact tax cuts/credits tend to be those that go to companies and reward short-term behavior. That's because companies generally more sophisticated than the average tax payer and are much more likely to use an appropriate tax cut or credit for creating jobs, saving jobs, purchases, investment, etc. than an individual will.

Sounds wrong to me.

First of all, there's nothing "unsophisticated" about an individual using a tax cut to reduce debt. It makes perfect sense. But this falls into the "private virtue, public vice" category. It's a good idea for the taxpayer, but when everyone does it the economy doesn't benefit.

Second, I ask again why tax cuts for business will cause them to expand in the face of declining demand. They won't.

Von, suppose your firm's case load drops. My guess is that you won't be hiring new lawyers, and that even if there were (heaven forfend) a $5000 "New Lawyer Tax Credit" you still wouldn't, because you would have no profitable work for a new lawyer.

We are not short of productive capacity. We are not short of workers. We are short of demand. So create demand.

"We are not short of productive capacity. We are not short of workers. We are short of demand. So create demand."

I agree with your final point, Bernard, and will be interested to see how von responds in your hpothetical drop in lawyering case-load demand.

However, I think the Stimulus should include tax cuts for small business, which is often said to be the backbone of the country's economic engine. In regard to that specifically, I read the other day in the NYT where many of them -- and we're talking about small businesses here -- are having trouble simply paying their rents (like the rest of America).

Some had been wondering about my assertion that tax cuts/rebates won't have much impact on the economy. Notice that von has never defended how they would have an impact.

Anyway, based on last year's results, don't look for much on an impact http://www.freep.com/article/20090123/BUSINESS07/901230448>this year

I think that von overstates the case for business tax cuts, but I also think the rest of you are over-discounting it. There really are a number of businesses which are either doing fine, or right on the edge of doing fine. A business that is doing fine, we typically want to expand (barring the purely countercyclical businesses like Debt Reduction Clinics and the like). Reducing their rate actually makes it more likely that they will be able to hire more people in a business which has proven that it can make it in tough economic times. Businesses on the edge will also be able to hire people, because the tax cut will make the marginal difference between hiring and not hiring become positive.

Now is this MORE effective as stimulus than direct tax rebates to consumers? I’m not sure. My gut feeling would tend more toward a wash, but I haven’t seen data.

Is it MORE effective as stimulus than 2-year projects. Probably, as the time factor is very important.

Von, suppose your firm's case load drops. My guess is that you won't be hiring new lawyers, and that even if there were (heaven forfend) a $5000 "New Lawyer Tax Credit" you still wouldn't, because you would have no profitable work for a new lawyer.

Well, likely nothing is going to encourage a failing business to hire workers that it can't pay. But your hypothetical tax cut might encourage a firm that is doing fine to hire lawyers from firms that are doing not so fine, or lower the opportunity costs for a marginal firm to diversify its practice. (And the current proposal that allows businesses increased deductions for bad investments could help a struggling companies -- although probably not a law firm.)

By the way, I'm not saying that individual tax cuts/credits shouldn't be included -- but, if they are going to be stimulative, they have to reward behavior that is stimulative.

"Well, likely nothing is going to encourage a failing business to hire workers that it can't pay."

von: I did not see where Bernard's hpothetical talked about a "failing" business. His talked about a drop-off in business, specifically in case load, and I'd think tax cuts/credits would help to some degree.


"Behavior that is stimulative" is, in English, spending. Customers with money to spend is all any business, large or small, needs in order to make a profit. Last I checked, businesses are taxed on their profits. Cutting taxes on non-existent profits seems like nothing but an ideological fetish, to me.

Now, if we're talking about refundable tax credits to businesses, then I have a question: what happened to all the Republican talking points against refundable tax credits for individuals? We have all heard them: tax refunds to people "who don't pay taxes" are socialist income redistribution, etc. So, tax refunds to businesses that don't pay taxes are what, exactly?

--TP

"I did not see where Bernard's hpothetical talked about a "failing" business. His talked about a drop-off in business, specifically in case load, and I'd think tax cuts/credits would help to some degree."

Also you can see this as a protective or stop-gap measure. A business which has had a moderate downturn may not have to lay people off if they have tax breaks on the employment tax (which I think is what is being discussed). So the tax break protects from things getting worse.

(In theory, I haven't seen data on it)

There are businesses that don't pay taxes?

Wowzers.

There are businesses that don't pay taxes?

2/3 of C-corps.

Re: paying farmers not to grow crops. I thought the rationale was that for any given farmer, the incentive was to (i) always have all acres in service with (ii) the most profitable crop. But that this was bad for the topsoil as it's really best to rotate crops and then leave an acre fallow every so often, thus the payments to do so. But maybe that's just all farm-propaganda I heard growing up in Iowa.

von,

Well, likely nothing is going to encourage a failing business to hire workers that it can't pay. But your hypothetical tax cut might encourage a firm that is doing fine to hire lawyers from firms that are doing not so fine,

That depends what you mean by "doing fine." I'm postulating a situation where the firm is not going broke, but has less business than last year. This is, after all, a pretty common situation for even profitable businesses today. In that sort of situation the motivation to expand, tax cuts or no, is not there.

Of course I'm analogizing to, say, a factory. If widget sales are down the factory is not going to buy new equipment, add a shift, etc., because they can't sell the extra widgets. No demand. The tax cut goes into the bank, or the owner's pocket.

Now, if you want to argue for employment-based small business credits, probably refundable, as a sort of handout to help small businesses keep from laying people off, as btfb and Sebastian seem to call for, then there is a case to be made. You do want to make sure the money doesn't just go into the owner's pocket (see "Bonuses, Wall Street") and as Tony says there may be a touch of philosophical backtracking involved, but it could do some good. If it really affected employment there would be some reduction in unemployment costs to offset the expense. I don't think you get a huge stimulus from that, but there are a lot of benefits.

My understanding is that Republican proposals are not employment-based. Giving tax breaks to stimulate investment, or to generate refunds, by itself will not help much, because there is nothing about them that will increase employment or economic activity in general. Why should a business owner who gets a big tax refund on a loss carryback invest that in expansion in the face of a poor economic environment?


I hate to derail this thread with my pseudo-philosophical musings, but the more I think about the stimulus package and the economic downturn, the more I think there’s no way to save the economy as we once knew it, which may be a good thing.

This discussion of Division A and Division B almost doesn’t matter. I think the short-term priority should be to mitigate as much as possible human suffering. Minimize starvation, homelessness and untreated illness. As far as stimulus goes, I’m not really sure what the goal is. Who are we saving, and from what? I don’t care so much for the GDP or the Dow Jones Industrial Average in and of themselves at this point. If we did give everyone $10k, and even if they did go right out and spend it, what then?

It seems to me that the underlying problem, regardless of the mechanisms that allowed it (CDOs, CDSs, sub-prime loans, etc.), is that we as a nation (perhaps as a species) have been spending money we didn’t have on things we didn’t need. We have no choice but to continue spending money we don’t have, but at least we can spend it on things we actually need. Going (further) into debt to get something that will pay for itself within a tolerable time frame is acceptable. Going further into debt to keep things going more or less the way they have been seems like putting off for some relatively short amount of time whatever would happen if we did nothing.

We’ve been playing the wrong game, and borrowing some more chips to keep playing won’t change that. We need real, fundamental value creation. We need something more than just moving money from one place to another under the guise of work, which really only results in either nothing or things of little worth, and makes a select view very rich. Let’s build (and maintain) real things that will make everyone’s life better in the future.

I’m not completely sure where I’m going with all this generalized ranting, but I’ve been feeling mentally constipated over what’s happening, so I took a dump here. Sorry.

On the Wall Street bonuses, some companies pay bonuses based on how their business unit does, not how the company as a whole does, so just because, e.g., Goldman lost $X billion last year doesn't mean no one can have a bonus.

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