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Red stimulus, blue stimulus, one stimulus, two stimulus

One angle of the stimulus debate that gets lost in the "stimulus: yes or no?" discussion is the disagreement between different types of stimulus. Should you use monetary or fiscal stimulus? Spending or tax cuts? Offset or not offset?

Keith Hennessey does the lord's work in a post today by grouping the debate into seven different camps. I don't agree with every word of it, but it's a very clarifying document. I'd also add that I've always liked Bruce Bartlett's point that if we had consumption taxes as opposed to income taxes -- and many economists think that would be a positive change all on its lonesome -- then it would be easy to simply cut the tax when you want to stimulate consumption.

By Ezra Klein  |  June 28, 2010; 6:20 PM ET
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Bruce said,
"And thinking about this from another perspective, suppose we had a VAT right now and we wanted to stimulated consumption. Reducing the VAT rate temporarily would be a wonderful way to stimulate consumption. Suppose you had a 10 percent VAT and we said we weren't going to collect it for the next 10 months. People would buy like crazy. They'd buy toilet paper, they'd buy anything they could get their hands on that they knew they'd need in the future. We're depriving ourselves of a great stimulant tool by ignoring this."

What happens on month 11? Other than toliet paper producers shutting down for awhile because, well, everyone went out and bought a year's supply? Like the homebuyer tax credit and cash for clunkers, demand will crash once the stimulus is over. We'd end up with little but demand volatility, which would probably wreck havoc with corporate planning.

Posted by: justin84 | June 28, 2010 7:17 PM | Report abuse

Consumption taxes should NEVER be mentioned without linking them to progressive income tax reform that will keep them from hitting the lowest economic brackets the hardest. You just don't do it.

Posted by: uberblonde1 | June 28, 2010 7:19 PM | Report abuse

Income effect vs. substitution effect. If we cut VAT, stuff would cost less. Maybe people would buy more. Or maybe they'd save the difference. If we cut income/payroll taxes, people would have more money. Maybe they'd buy more. Or maybe they'd save the difference.

Of course, the people who pay more VAT as a proportion of their income would buy more. But that's just because VAT is regressive. The more regressive a VAT is, the more stimulative (and more progressive) a tax cut of it would be.

Posted by: max_power | June 28, 2010 7:44 PM | Report abuse

It seems to me that Keith Hennessey's piece to which Ezra Klein calls attention overlooks one sort of stimulus that a great many people would understand and support and that has not been any large or very apparent part of Bush's or Obama's efforts, namely, something along the lines of the 1930s WPA. While often ridiculed, that program both put many unemployed people to work and delivered many lasting public benefits.

Offering people who need work (and are not or are no longer eligible for unemployment benefits) full-time jobs at the current minimum wage would not only help those people meet their essential needs but increase demand for the goods and services that meet those needs, and thus increase income for the businesses supplying those goods and services. Some of those businesses would be able to remain solvent and keep their employees working rather than cutting back or closing down and adding to the rolls of the unemployed. The trickle-up effect would be manifest to most people.

If worthwhile projects were chosen, the increased public deficit could be justified as an investment in specific public benefits, analogous to those that resulted from the better-planned programs of WPA. The programs might well be planned and managed by the states, but regulated and heavily subsidized by the federal government, much as highway construction is.

Although born in 1929 and only a youngster during the 1930s, I remember well what a blessing a WPA job was for some hard-hit families, though not my immediate family. Looking back, it seems to me that program really was pulling the US economy out of depression even before war work became available. Of course, on that issue, I defer to the better judgment of people who have seriously studied economic trends during the years 1935-39.

Posted by: Gerry6 | June 28, 2010 8:03 PM | Report abuse

I suggest a further sub-division of Hennessey's "Third Depression Camp" into those who believe that urging long-term fiscal rectitude helps the cause by making deficit doves seem more responsible, and those who believe that such a concession undermines the cause by reinforcing all the misconceptions on which the deficit hawk narrative is based. I suppose those of us in the latter group are the loneliest of the lonely.

Posted by: amileoj | June 28, 2010 8:08 PM | Report abuse

Camp zero: I'm a debtholder/banker/central banker, and while my numbers suggest that fiscal stimulus would do great things for the unemployed/middle/lower class,

they also suggest that depression economics and any associated deflationary spiral would be great for my relative wealth. the unemployment rate is irrelevant and the possibility of a 5 basis point-rise in long term inflationary expectations deservedly haunts my dreams.

its possible that there are other camps, but this is the one with access to policy levers.

Posted by: eggnogfool | June 28, 2010 8:43 PM | Report abuse

"Income effect vs. substitution effect. If we cut VAT, stuff would cost less. Maybe people would buy more. Or maybe they'd save the difference."

I don't think these are competing effects. A decrease in VAT would drive higher spending, particularly on durable goods - particularly if the cut was temporary.

In any case, once the VAT cut occurs demand surges and then once it is raised back to normal demand plunges.

Posted by: justin84 | June 28, 2010 9:05 PM | Report abuse

8 republicans, including cochran and isakson, voted for cloture on the tax extenders bill in early march

Posted by: jackjudge4000yahoocom | June 28, 2010 9:35 PM | Report abuse

state medicaid rolls swelling, long-term unemployment at a historic high -- debt service costs low. least dirty shirt, yes, and likely first to be laundered and pressed. where ya gonna go

Posted by: jackjudge4000yahoocom | June 28, 2010 11:24 PM | Report abuse

As long as the right controls the man on the street's view of economics, we're probably "cooked".

For those with no sense of economics whatsover, it can seem like Obama took office and things started really falling apart (up to that point they were being held together with chewing gum and home equity loans).

On top of this immediatism, the right is successfully propagating, with the help of revisionist history, the view jthat JUST AS IN THE GREAT DEPRESSION, both Bush and Obama's bailouts, and the Obama stimulus really CAUSED our current misery - that it would have all blown over just as the Great Depression would have.

what I think we need:

1) wider understanding of the utter misery in the rest of the world caused by Friedmanism run amok.

2) better understanding of how the Wall Street Ponzi Paradigm works -- making it look as common sensical as Perot with his flip charts SEEMED for a while. Is it so hard to see the morphing of Wall St. from partnerships into corporations providing more in SALARIES than the typical partner used to make, which can go bankrupt at no cost to the peole who made the bad decisions (and to some extent this applies to corporations in general).

3) a narrative, somehow understandable to "regular people" of what DID happen in the thirties - what worked and what didn't, and can
anyone please explain HOW the measures taken in the current crisis saved us from something worse (because most people just don't believe that).

My 2 cents worth of attempted explanation:

When the market is stalled, and government does nothing, laid off people lose job skills (and maybe even the habit of working). Young people postpone their entry into the job market and may develop negative habits that will stay with them. Theft and robbery may rise. There is less training and education. Infrastructure wears out. Vacant buildings deterioriate or are vandalized.

I.E., there is real loss of aggregate value -- of the work force as well as of physical assets, which the "money saved" through frugality - mere bits on computer disks -- cannot restore.

So we may have less debt, but less means of repaying debt, which could lead to more and longer lasting debt.

Misguided austerity is like forbidding a man from borrowing from a relative to buy a suit that he needs for job interviews.

Posted by: HalMorris | June 29, 2010 8:54 PM | Report abuse

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