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Posted at 4:39 PM ET, 12/ 8/2010

Mark Zandi on the tax cut deal

By Ezra Klein

zanditable.jpg

I called Moody's chief economist Mark Zandi this morning to see what he thought of the tax cut deal. When it comes to stimulus, Zandi's figures are probably the most influential in the country, and I've cited them several times before on this blog. So what does he think? Well, he likes it. He really, really likes it.

"This will make a difference," he says. "It will add a lot to growth in the first half of next year, when the recovery will be at its most vulnerable. It really seals the deal for the recovery evolving into a self-sustaining economic expansion."

That reads to me like overstatement, to be honest. If, say, Spain collapses, I don't think a modest payroll tax cut will save the American economy. But Zandi's figures are nevertheless encouraging. He thinks the package will add as much as a full percentage point to economic growth in 2011, and a bit less than that in 2012. His estimate is higher than, say, the estimate from Macroeconomic Advisers (they put it at an extra half-a-percentage point in 2011) because he thinks the provision to allow businesses to deduct 100 percent of the costs of new investments in 2011 will be more effective at spurring business spending than most analysts currently predict. "I think we’ll see a big pop from it next year," he says.

I also asked him about the Bush tax cuts. His own figures say they're a horrible deal on stimulus grounds, returning only 35 cents in new economic activity for each dollar we spend. "In normal times," he says, "tax cuts to this upper income group wouldn’t add a whole lot of economic juice, and tax increases wouldn’t be a detriment to economic growth. But these aren’t normal economic times. Given the uncertainties involved and the risks, I just don't think it’s worth battling over."

And as for jobs, he now expects to see a substantial reduction in the unemployment rate over the next two years. "By the end of next year," he says, "we’ll be south of 9 percent, and probably approaching 8.5 percent. And then by the end of 2012, we’ll be below 8 percent and closing in on 7.5 percent." Those numbers are far from what we'd consider normal, but they're a legitimate improvement over the current situation. Here's hoping.

Note: The table atop this post represents Zandi's estimates of the price tag for different parts of the package. It's not the official price tag -- that's forthcoming from the Joint Tax Committee -- and I think it's possible that Zandi's estimates for the refundable tax credits accidentally omits their 2011 costs, as they're definitely not zero.

By Ezra Klein  | December 8, 2010; 4:39 PM ET
Categories:  Taxes  
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Next: Nothing is agreed to until everything is agreed to: Jeff Merkley edition

Comments

His figures are twice what Macroeconomic Advisers are and they still only mean(using Okun's Law) a half point less on the unemployment rate in 2011 and less than a half point in 2012.

This is extremely inefficient stimulus, almost all tax cuts with small multipliers and little or no long term investment value at a cost of almost a trillion, and many trillions in the future if it leads to a permanent extension of the Bush tax cuts. And with all that debt the Fed may be less likely to add stimulus.

The only thing that could make it worth it is if it substantially decreases the odds of a President Palin, but I'm not so sure it will.

Posted by: RichardHSerlin | December 8, 2010 5:12 PM | Report abuse

Plus if the economy does recover in 2012 the Republican machine will scream, see tax cuts work, spending fails!

The timing is very ugly for misleading the public in an extremely harmful way.

And they would also scream this and run on it, perhaps successfully, to not wreck the recovery by raising taxes.

Posted by: RichardHSerlin | December 8, 2010 5:15 PM | Report abuse

As a general rule it's never a good idea to raise tax rates in a recession. However I wonder if Mr. Zandi factored in the markets reaction to the extension. Interest rates on all types/classes of bonds shot up. The bond markets may start telling us we can't afford to ignore the deficit much longer. Fingers crossed.

Posted by: kchses1 | December 8, 2010 5:32 PM | Report abuse

I'd like to say something about this, but what occurs to me is: 'that's just crazy'.

The stimulus is tiny and the deficit charge is large.

max
['From tiny seeds grow mighty... small plants.']

Posted by: theinfinitiveofgo | December 8, 2010 5:41 PM | Report abuse

"But Zandi's figures are nevertheless encouraging. He thinks the package will add as much as a full percentage point to economic growth in 2011, and a bit less than that in 2012."

"And as for jobs, he now expects to see a substantial reduction in the unemployment rate over the next two years. "By the end of next year," he says, "we’ll be south of 9 percent, and probably approaching 8.5 percent. And then by the end of 2012, we’ll be below 8 percent and closing in on 7.5 percent." Those numbers are far from what we'd consider normal, but they're a legitimate improvement over the current situation. Here's hoping."

It will be interesting to see the political narrative that comes out of this if these predictions come to pass.

I.e. the Republicans will likely claim that while the the American Recovery and Reinvestment Act of 2009 (aka the stimulus) passed by the Democrats failed to reduce the unemployment rate below 9%, the compromise tax cut bill did reduce unemployment below 8% and increase growth thus proving that tax cuts and supply side economics works.

Posted by: jnc4p | December 8, 2010 5:44 PM | Report abuse

if Zandi's numbers are even halfway accurate, Obama is a shoo-in for reelection come 2012.

Posted by: kyle_bc | December 8, 2010 5:54 PM | Report abuse

I have a question regarding the actual proposal Obama is championing. Did he ever lay out EXACTLY which of his cuts will and will not be extended? Have reporters confirmed with his staff or are the assumptions being made based on his speech and press conference?

I did not see where the Making Work Pay tax cut is not being extended in his statements, but I didn't see where it is. Has this been confirmed one way or another or is the absence of it from his statements what people are basing these figures on?

Thanks!

Posted by: jhw221 | December 8, 2010 6:05 PM | Report abuse

What a horrible thing to do to America's children. The deficit is out of control and soon foreign markets will not trust the dollar any longer. If people stop trusting the dollar, with our debt load, the economy will collapse.

Posted by: AndyZ1 | December 8, 2010 6:07 PM | Report abuse

I've listened to Zandt many times. He's a good man, he's just more optimistic than most on his unemployment figures. Last week he was saying we are guaranteed to go over 10% on the morning of the badjobs number. His change is a little schizo for me, but he's certainly a respectable figure.

Posted by: 54465446 | December 8, 2010 7:09 PM | Report abuse

--*but he's certainly a respectable figure.*--

The more I read about Zandi, the bigger a quack he looks.

An inkling (Wikipedia): "Zandi uses old-style Keynesian models in the spirit of Nobel Prize winner Lawrence Klein. The utility of such models to gauge the impact of fiscal stimulus has been questioned by Harvard economist Robert J. Barro."

Zandi is at the barking moon end of the Keynesian rubber room.

And despite writing Moody's on the matter, I have yet to see any justification for Zandi's oft quoted multipliers, which appear to be offered and accepted solely on faith.

Posted by: msoja | December 8, 2010 7:59 PM | Report abuse

msoja:

He's very reasonable when you see him talk. He is just very up when he's up and very down when he's down, thus the schizo reference.

This is a stimulus endorsing column. What did you expect from some one who wrote that Romer did a good job?

I actually have seen some evidence that Ezra is moving away from college professors a bit this week. That's probably wildly optimistic on my part, but let's give the boy a chance to grow into his job for just a bit longer.

Posted by: 54465446 | December 8, 2010 9:17 PM | Report abuse

The fact is that we could have gotten 100% of the economic benefit of this without giving tax cuts to the wealthy.

In other words, we're laying debt on future generations just because Obama doesn't have the guts or brains to negotiate.

Posted by: postfan1 | December 8, 2010 10:43 PM | Report abuse

Wow.

So every $1 spent in tax cuts to the wealthy generate 35c in economic activity.

And that economic activity returns about 20% in taxes, so the government spends $1.00 and returns $0.07 in taxes.

How does ANYONE believe the 'tax cuts pay for themselves' theory if we're off by a factor of 14.3?

Posted by: JohnJay60 | December 8, 2010 11:10 PM | Report abuse

--*How does ANYONE believe the 'tax cuts pay for themselves' theory if we're off by a factor of 14.3?*--

It's not YOUR money. If you quit trying to *spend* other people's money for them, you wouldn't have to endlessly worry yourself silly about the optimal amounts and methods for stealing the stuff. Spend your own money in support of your own life and quit pretending that your neighbor(s) should be picking up the slack. Your life is not their business, and their lives are not your business.

It's getting almost impossible in this country to find a transaction that the government doesn't have its hooks in. It's sick.

Posted by: msoja | December 9, 2010 12:27 AM | Report abuse

--*I actually have seen some evidence that Ezra is moving away from college professors a bit this week.*--

He's not quoting Yglesias again, is he?

Posted by: msoja | December 9, 2010 12:29 AM | Report abuse

It's odd how people who are trying to pass this bill off as "centrist" don't seem to realize that Republicans LIKE tax cuts for poor and middle-class people, and hence these things do not qualify as concessions on their part.

Posted by: brickcha | December 9, 2010 7:04 AM | Report abuse

This article, like most, fails utterly in making the proper distinction between taxes (measured in dollars per year) and tax rates (which are percentages, a dimensionless number).

Basic accounting reminds us that payments must match purchases. For the federal government, the budget specifies the purchases and the payments are taxes. These taxes may take the form of current year revenues or borrowing, which is a pledge of future tax revenues (plus, of course, interest payments).

In 2001, when President Bush came into office, the total federal tax burden was $1.86 Trillion (or in more human terms, about $6,300 that year for every man, woman, and child in the country). By 2008, President Bush's last full year in office, the federal tax burden had grown to $3 Trillion (or $10,000 that year for every man, woman, and child in the country). And, that didn't include the taxes required to fund the wars in Iraq and Afghanistan as those were "off budget".

So, there were no Bush tax cuts. There were Bush tax increases, and adjusted for inflation they were the largest in a generation.

So why are we still referring to "Bush tax cuts"? Although President Bush never cut taxes, he did cut income, dividend, and capital gains tax rates. He successfully conflated tax rates with taxes and convinced Americans, even his Democratic opponents, that he cut taxes when in fact taxes skyrocketed.

Conflating taxes and tax rates has been great politics but disastrous policy, which President Obama is now continuing. The new tax rates have shifted the increased federal tax burden in several important respects. The richest and poorest now pay smaller percentages of current year tax revenues, while the middle class pays higher percentages (no wonder there was a middle class backlash against the Republican Party and now against the Democratic Party). Most dramatically, there has been a shift from paying for spending with current year tax revenues to borrowing. As a combined result of massive tax increases and tax shifting, the federal government has moved from surplus to record deficits, and in less than ten years the federal debt has more than doubled – with Total Public Debt Outstanding now totaling more than $40,000 per American.

As long as the distinction between taxes and taxes rates remains unclear, the nation will continue to suffer the consequences of bad budget and tax policies and risk a terrible fiscal reckoning.

Posted by: johnnelson1 | December 9, 2010 8:31 AM | Report abuse

This analysis could be valid. We should be skeptical of the source, however. The primary benefactor of a tax cut extension is Wall Street. The ability to take fund earnings and treat them like capital gains is worth lying for. This forecast is similar to the supply side forecasts going back to the 1980’s. Unfortunately, they never really panned out. Good for Wall Street, though.

Posted by: NewThoughts | December 9, 2010 8:32 AM | Report abuse

Politically, I think this move was brilliant. There is a grenade sitting in the middle of the Republican caucus because of this. The TP Partyers will vote no of course, but the normal crazy conservatives will probably vote yes. Could be another Medicare Part D moment for the republicans. Plus Obama has completely stolen the narrative on tax cuts. If the recovery is halfway decent by 2012, I'd expect to see Obama pitch some kind of massive tax re-structuring as part of his re-election campaign.

Posted by: willows1 | December 9, 2010 10:33 AM | Report abuse

willow and richardserlin:

See Ezra's post today on Krugman for more about our discussion from this one.

Posted by: 54465446 | December 9, 2010 11:35 AM | Report abuse

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