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Research desk explains: How effective would deficit-neutral stimulus be?

By Dylan Matthews

In the Wall Street Journal the other day, Princeton economist Alan Blinder had an interesting idea for bypassing deficit concerns to get stimulus measures passed. Blinder proposed letting the Bush tax cuts for high earners expire early, providing $75 billion in new revenue over the next two years, and using that money to fund unemployment benefits extensions. Using the "bang for the buck" measurements (PDF) of stimulus policies produced by Moody's Mark Zandi, Blinder estimated this would add almost $100 billion to GDP over those two years.

This is a sensible measure, but Zandi's data -- the methodology of which I get into in some depth here -- shows the impact of spending on various stimulus measures apart from unemployment benefit extension. What would be the GDP impact of spending the Bush tax cut revenue on those measures?

I used the same back-of-the-envelope math as Blinder to compute the result. Zandi finds that extending the Bush tax cuts has a stimulus multiplier of 0.32, which is pretty weak. Extrapolating from that, repealing $75 billion worth of them early should reduce GDP by about $24 billion. We can then use the bang-for-buck measures of different stimulus policies to see what effect spending $75 billion on each would have, and then subtract that $24 billion figure to see what the impact would be if coupled with early expiration of the tax cuts. All of the policies listed here are pretty straightforward, except the combined unemployment benefit and food stamp item, which takes $33 billion to pay for the soon-to-pass unemployment benefit extension this year and uses the rest to fund expanded food stamps. Here's what the impact of each looks like:

stimulative_impact_of_bush_tax_cut-funded_spending.png

While the housing tax credit is relatively weak, and a corporate tax cut has no effect at all, every other stimulus policy, coupled with lifting some of the tax cuts, produces real stimulus. These are rough numbers, but they do suggest that effective, deficit-neutral stimulus policies are possible.

By Ezra Klein  |  July 20, 2010; 3:10 PM ET
Categories:  Stimulus  
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Comments

Why don't we actually RAISE corporate tax rates and LOWER payroll tax rates while we're at it.

Posted by: stevie314 | July 20, 2010 3:27 PM | Report abuse

I think that something like this would really put the GOP in a corner.

Posted by: mschol17 | July 20, 2010 3:34 PM | Report abuse

For the items on your list that are tax cuts, is there opposition to these items based on deficit concerns? I wonder if a payroll tax holiday can't be passed anyway, since as a tax cut, it magically doesn't need to be paid for. If you want overall tax reform, one strategy is to cut payroll taxes for N years by some amount and let the Bush tax cuts expire entirely.

Posted by: windshouter | July 20, 2010 3:42 PM | Report abuse

In addition, if the goal is to maximize job creation per dollar, rather than GDP per dollar, there are deficit-neutral possibilities for job creation stimulus.

For example, in the January 2010 edition of the Upjohn Institute's newsletter, I estimated that in the 2009 fiscal stimulus package, the average cost of creating one "job-year" was $112,000. (Spending is better than tax cuts, at $92,000 per job-year versus $145,000, but both are expensive). However, more direct job-creation measures, such as public service jobs and well-designed wage subsidies, are considerably cheaper per job-year created. I estimate that a public service jobs program for disadvantaged workers could cost $34,000 per job created, and a well-designed wage subsidy program could cost $29,000 per job created. (I should add that the current Schumer-Hatch wage subsidy proposal is not, in my opinion, well-designed; Obama's original wage subsidy proposal was much better designed).

If the problem is job creation, we need to directly target job creation with our policies to get the maximum effect per dollar.

Tim Bartik, Senior Economist, Upjohn Institute

Posted by: bartik | July 20, 2010 3:44 PM | Report abuse

So, why exactly did Senate Democrats recently oppose a deficit-neutral augmentation of unemployment insurance handouts? If such handouts could indeed be made temporary and be accomplished in a deficit-neutral manner, why did Democrats stall so long and even take pride in lambasting advocates of such deficit-neutral stimulus??

I'm beginning (?!) to wonder if there might be some partisan politics involved in all of the economic calculations, projections, and suggestions... If I had a cynical mindset, I'd be thinking that some of the self-proclaimed economic scientists were merely political hacks.

Posted by: rmgregory | July 20, 2010 3:46 PM | Report abuse

Ode to Corporate Welfare!

When Bush cut the Taxex across the board the jobs came immediately...I saw the Job Growth by the end of the second year after their enactment.

After Obama's stimulus with all these great multiplier predictions we hear nothing but crickets!

Posted by: FastEddieO007 | July 20, 2010 3:47 PM | Report abuse

rmgregory,
The defecit-neutral unemployment extension was by taking from the stimulus funds, not by ending the Bush tax cuts early.

Posted by: mschol17 | July 20, 2010 3:48 PM | Report abuse

Could it be these multiplier tables have been written by "really smart" college professorial types who never actually ever did anything real in their whole entire life?

I have yet to see any single case where they were verified in real life!!!

Posted by: FastEddieO007 | July 20, 2010 3:49 PM | Report abuse

If the economy is being limited by a lack of money supply, then I cannot see how you could do anything better than providing quick money to the most profitable sectors of the economy-----that would clearly be the part of the economy that is being inhibited from going after unexploited growth opportunities due to lack of investment money and suffering from the greatest risk-to-reward penalities.

Posted by: FastEddieO007 | July 20, 2010 3:52 PM | Report abuse

@fe007: When Bush cut the Taxex across the board the jobs came immediately...I saw the Job Growth by the end of the second year after their enactment.

Pining for bushonomics which produced the only 2 term presidency with net job losses this century. In fact, both "recoveries" during the Bush years were correctly called "jobless recoveries" because the number of new jobs didn't make up for the jobs lost during the recessions+population growth.

Bushonomics brought on the worst recession since 1929, but for the top 5% of income earners it was great!!!

Of course, we are still putting the bill for the bush tax cuts on our children, but unemployment benefits those will be a far greater burden on our progeny than tax cuts, which according to republicans don't need to be paid for.../snark

Posted by: srw3 | July 20, 2010 3:59 PM | Report abuse

Dylan,

Those food stamps at the top of that graph there. Do they include THESE food stamps?

http://amfix.blogs.cnn.com/2010/07/20/scammed-your-tax-dollars-buying-smokes-beer/?hpt=Sbin

Posted by: visionbrkr | July 20, 2010 4:09 PM | Report abuse

Posts like this make me think that David Brooks is right on the money today:

"When historians look back on this period, they will see it as another progressive era. It is not a liberal era — when government intervenes to seize wealth and power and distribute it to the have-nots. It’s not a conservative era, when the governing class concedes that the world is too complicated to be managed from the center. It’s a progressive era, based on the faith in government experts and their ability to use social science analysis to manage complex systems.

This progressive era is being promulgated without much popular support. It’s being led by a large class of educated professionals, who have been trained to do technocratic analysis, who believe that more analysis and rule-writing is the solution to social breakdowns, and who have constructed ever-expanding networks of offices, schools and contracts.

Already this effort is generating a fierce, almost culture-war-style backlash. It is generating a backlash among people who do not have faith in Washington, who do not have faith that trained experts have superior abilities to organize society, who do not believe national rules can successfully contend with the intricacies of local contexts and cultures.

This progressive era amounts to a high-stakes test. If the country remains safe and the health care and financial reforms work, then we will have witnessed a life-altering event. We’ll have received powerful evidence that central regulations can successfully organize fast-moving information-age societies.

If the reforms fail — if they kick off devastating unintended consequences or saddle the country with a maze of sclerotic regulations — then the popular backlash will be ferocious. Large sectors of the population will feel as if they were subjected to a doomed experiment they did not consent to. They will feel as if their country has been hijacked by a self-serving professional class mostly interested in providing for themselves."

http://www.nytimes.com/2010/07/20/opinion/20brooks.html?ref=opinion

Posted by: jnc4p | July 20, 2010 4:26 PM | Report abuse

If unemployment benefits don't have to be paid for why are we only extending them? We should make them 100% of previous salary and extend them indefinitely. We'll soon have GDP through the roof. What could go wrong?

Posted by: MrDo64 | July 20, 2010 4:40 PM | Report abuse

One of the old GOP conservative economists was on CNBC this am (Feldman?) saying that we could reduce the deficit without raising marginal tax rates or cutting spending by taking aim at all the tax expenditures in the budget. Host Mark Haines pinned him down that he meant, among other things, limiting the mortgage deduction and eliminating a bunch of other tax breaks that the GOP loves. But it is a good idea.

In addition to putting defense on the table, we need to be looking at other ways to get some budget savings that will take effect soon, rather than fantasizing about pushing the retirement age (full benefit age) to 70 for people retiring in 2025, when the savings would start to kick in.

I still favor infrastructure jobs, green tech jobs and preventing states from laying off teachers and police (Oakland is laying off 80 cops--Oakland!) But the current policies are (deliberately on the GOP's part) not doing nearly enough to ward off a generation of bad effects.

Posted by: Mimikatz | July 20, 2010 4:45 PM | Report abuse

@fe007:If the economy is being limited by a lack of money supply, then I cannot see how you could do anything better than providing quick money to the most profitable sectors of the economy

Why is that? The most profitable sectors of the economy are the folks that DON'T need additional capital as they are raking in huge profits. Why can't they use that for capital?

It is the new and emerging industries and technologies that might need some TEMPORARY help getting established, like green energy, nanotechnology, pollution mitigation, oil spill cleanup, etc.

-----that would clearly be the part of the economy that is being inhibited from going after unexploited growth opportunities due to lack of investment money and suffering from the greatest risk-to-reward penalities.

How is a sector of the economy with robust profits being inhibited from doing anything and why would profitable companies have problems with lack of investment? Profitable companies are the ones that attract capital, right?

Posted by: srw3 | July 20, 2010 5:03 PM | Report abuse

How is a sector of the economy with robust profits being inhibited from doing anything and why would profitable companies have problems with lack of investment? Profitable companies are the ones that attract capital, right?

Imagine you have opened a restaurant in a small suburb with a very promising young staff of cooks. You picked a small old building.

Imagine right after opening you have folks lining up to come in---more than you could handle, though eventually the crowd eeks down to a manageable level.


Maybe you should expand? But its a recession? How might new healthcare legislation effect hiring 10 more workers? Paying contractors to expand the building i.e. 1099 forms for evey payout of $800? Your last dolloar earned is currently being taxed at the top bracket, and thus any new profits will also be taxed at highest rate?

Maybe you shouldn't expand afterall?

Posted by: FastEddieO007 | July 20, 2010 5:11 PM | Report abuse

Obama's economic plan is to try and stay as popular as possible while committing the USA on a path toward Cloward-Piven bankruptcy triggering a violent uprising by the poor who will kill our babies.

Posted by: FastEddieO007 | July 20, 2010 5:15 PM | Report abuse

What extremists these Republicans are for demanding that we make cuts in 2014 budget in order to pay for unemployment!!!

How dare they!

Obama cannot fundamentally transform this nation without raidcally bankrupting it first.

Posted by: FastEddieO007 | July 20, 2010 6:01 PM | Report abuse

@fe007: Your last dolloar earned is currently being taxed at the top bracket

Just to be clear, this means that this restaurant owner's net profit, his/her salary after paying business expenses is at minimum more than $373,650 to get to the top bracket. That puts this restaurant owner in the top 1% of all income earners.

Sorry, I can't feel sorry for a person complaining because his/her INCOME OVER $373,650 is being taxed a higher rate.

Clearly the restaurant owner is on his/her way to the poor house because his taxes are too high. /snark

At $373,650 s/he pays about 29% of his income in taxes. At 473,650 s/he pays about 30.3% of his income in taxes. So when his/her income goes up 25% ($100k), his/her tax rate only went up 1.2%. Clearly this is confiscatory taxation at its worst.

Who would want an extra 25% in income if it means paying an extra 1.2% of that higher income in taxes....

Posted by: srw3 | July 20, 2010 6:23 PM | Report abuse

@fe007:What extremists these Republicans are for demanding that we make cuts in 2014 budget in order to pay for unemployment!!!

What hypocrites these republican are for running up trillions of dollars in debt fighting (and totally mismanaging) wars of choice and giving tax cuts for the wealthy and then refusing to spend a tiny fraction of that on unemployment benefits because it would add to the deficit. In fact, I believe when republicans controlled congress and the presidency they didn't pass one budget that was in balance. They definitely have the moral high ground in this fight....oh wait...

Posted by: srw3 | July 20, 2010 6:28 PM | Report abuse

Buried in this post is the admission that "tax cuts for the wealthiest Americans" only contribute about $38 billion ($75 billion over 2 years) to a $1,400 billion budget deficit. Less than 3% of the deficit this year comes from tax cuts on the "wealthiest Americans." The other 97% is from tax cuts on people OTHER THAN the "wealthiest Americans," and from massive increases in spending.

Would someone in the media say that louder, please?

Posted by: aindik | July 20, 2010 7:49 PM | Report abuse

i'd like to point out how amusing i find srw's statement "Who would want an extra 25% in income if it means paying an extra 1.2% of that higher income in taxes?"

umm, maybe you didn't study economics, but looking at marginal impact compared to overall effective tax rates is really strange.

yea you get 100k in extra income, but of that 100k, you only capture 60k. i think you are mixing the up whole structure of marginal rate analysis which is designed to take into account incentive effects of the last dollar principle, not the overall (effective) tax burden.

plus given the relative increasing cost of one's utlity input, combined with the decreasing marginal utlitity of that extra dollar, it's not as if you are trading an effective tax rate for an absolute money gain anyway, even if we ignore your lapse.

i have no doubt that raising the top marginal rate to 41% or whatever will have comparatively small excess burden effects...however, i wouldn't support this contention with confusing ETR and MTR.

economists think on the margin.

Posted by: stantheman21 | July 20, 2010 10:29 PM | Report abuse

Ezra Klein sat by quietly while his JOURNOLIST discussed ways to shut down opposition news organizations. I am from the former Soviet Union and I find this disgusting. Klein and his friends are radical extremists that are dangerous to freedom.

Posted by: dencal26 | July 21, 2010 8:25 AM | Report abuse

On top of wasting 860 Billion in the stimulus there is no purpose tossing another 75 Billion on the fire. Of course Klein wanted to write " Bush Tax Cuts" somewhere .

Posted by: dencal26 | July 21, 2010 8:26 AM | Report abuse

Tax cuts expiring for the rich account for very little of the deficit. The down-range effect is no stimulation of the economy because employers will keep what is left to pay the anticipated higher taxes that will ensue vice hiring new employees. Government spending is not economic stimulation; it's a handout and welfare no matter how you pretty it up and spin it.

Again, Mr. Klein and his ilk have to blame Bush and bail out their "annointed one" and his liberal zealots who pass a pay-as-you-go LAW and then break/ignore it at every turn.

Posted by: pielusztcontractor | July 21, 2010 8:42 AM | Report abuse

This is some of the dumbest "thinking" I have ever witnessed.

Tax cuts don't cost. *Spending* costs.

Do you complain to your employer that your lack of income is the reason why you are in debt?

This argument that tax cuts 'cost' is like holding the bolo paddle ball static and blaming the paddle for repeatedly hitting it. It's bass-ackwards

Posted by: WrongfulDeath | July 21, 2010 8:58 AM | Report abuse

"Ezra Klein sat by quietly while his JOURNOLIST discussed ways to shut down opposition news organizations. I am from the former Soviet Union and I find this disgusting. Klein and his friends are radical extremists that are dangerous to freedom."
You should have stopped it. You should have done something. Instead you remained silent as the very least.

How does it feel to be the new Joseph Goebbels?

Posted by: WrongfulDeath | July 21, 2010 9:23 AM | Report abuse

"Ezra Klein sat by quietly while his JOURNOLIST discussed ways to shut down opposition news organizations. I am from the former Soviet Union and I find this disgusting. Klein and his friends are radical extremists that are dangerous to freedom."
You should have stopped it. You should have done something. Instead you remained silent as the very least.

How does it feel to be the new Joseph Goebbels?

Posted by: WrongfulDeath | July 21, 2010 9:28 AM | Report abuse

2006& and 2007 belong go the democrats who took over congress and started those wonderful "a house for everyone" programs then add-inObama's campaign lies and you have an Award Winning Recession!

Posted by: jim2343 | July 21, 2010 1:19 PM | Report abuse

This chart is BS, The Bush Tax Cuts created JOB's The proof is in the pudding. If you cut taxes, how the hell can anyone then say if there reinstated we'll have a deficit problem....? If you don't take in X amount of Taxes your not running a deficit. Example..... If I made $300,000 in 2009 and this tax yr. I'm only gonna make $200,000 do I have a $100,000 deficit ? Absolutely not !!!! This example is no different than the amount of Tax revenue our Gov't takes in, if they take in $500 Trillion and decide to take in $450 Trillion the following years while cutting $50 Trillion in gov't programs wheres the deficit ???

It all boils down to Congress has to freeze their Spending Period !!! To continue UE Benefits for a person for 12 months or longer is nothing more than Welfare, there's many employers looking for good people to hire, but with many staying home collecting UE where they maybe making just as much then if they actually had a JOB why would or should they. what incentives is there to get off UE Benefits, NONE !!! Bottom line is Congress needs to have there credit cards taken away for say 5 or 10yrs until we have a balanced budget, and stop the rhetoric of "spending a $1 of Stimulus creates $1.50 in revenues" Who ever made this statement among the Democrats party didn't know and doesn't know what the hell there talking about !! How can anyone spend a $1 and get more than a $1 in return Silly unfounded idealistic thinking is what it is !!!

Has anyone ever got a JOB form a Poor person ?? Or do most people get JOBS from wealth, rich people who actually have a business making BIG money ?? For the Have not's to continue to tear down the Have's is the wrong way to go and to continually tearing down Capitalism is wrong as well especially people like Michael Moore who despises Capitalism & who is a wealthy man and who capitalized off the Capitalist system we currently have wants to move off the Capitalistic system over to Socialism, Hmmmmmmm What will people like Michael Moore do then !!! Eventually you run out of other peoples money !!! Same idea as if we continue to hire people to continually take Federal Job's and screw the Private sector Jobs eventually you run out of money to fund those benefits all those Gov't employees receive right ???

Posted by: dwenzel2 | July 21, 2010 1:52 PM | Report abuse

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