The New Republic

As stimulus goes this has got to be a lot weaker than about a dozen other moves that could be made. For example, a deeper cut in the employee payroll tax. As to your initial claim, there's no credible reason Obama couldn't have gotten a larger stimulus package initially, and one more oriented towards higher-multiple spending programs rather than tax cuts that went to savings. In retrospect, it looks like that was his one big shot; and he blew it.

- subterran

June 9, 2011 at 12:50am

Yeah, I'd much, much rather see another employee side cut (or a payroll tax holiday) than an employer cut. I'm, um, not going to pretend to be Christina Romer's equal in economics (and I applaud her for being one of the people pushing hard and loudly for a much larger stimulus in 2009), but it seems to me that banks are already earning plenty of profits right now but they're still not using those profits to expand and hire more employees, so cutting their taxes will give them even more profit but will not necessarily cause them to hire more people. But we know that giving employees more money will offer concrete assistance and help stimulate demand.

- Jbryan

June 9, 2011 at 6:59am

Two points. First, while I'd cut the employee's share of payroll taxes too, reputable economists say that the employee actually bears (in the form of lower wages) almost all of the employer's share of payroll taxes, so a cut in the employer's share of payroll taxes is indirectly a cut in the employee's taxes. Second, for both economic reasons and politicial reasons I'd couple the cut in payroll taxes with restoration of the Clinton-era income tax rates. For economic reasons, the high-income Bush tax cuts do next to nothing to stimulate the economy (rich people save not spend the tax cuts). For political reasons, let's see Republicans object to a proposal that would significantly reduce the taxes paid by the overwhelming majority of working Americans because it would raise the taxes paid by the wealthiest Americans (and thereby lower the deficit). I've committed not to criticise Obama, but if he does propose only a cut in the employer's share of payroll taxes (with no cut in the employee's share and with no corresponding elimination of the Bush tax cuts), I suggest that he start wearing dresses to fit his image.

- rayward

June 9, 2011 at 7:28am

No, no, no. This is more Supply-Side BS, that cutting taxes encourages employers to hire. No. A positive economy encourages employers to hire. And you GET a positive economy by retiring all that CDO debt, sending more funds to the states so THEY don't have to fire their state workers, and encouraging the banks to loan money. Further crippling Social Security in the name of Supply-Side approaches will accomplish very little. I'll note Boehner was able to get 150 economists to sign a letter saying the Ryan Plan would work -- just because there's a lot of Supply-Side economists doesn't make them right.

- AllanL5

June 9, 2011 at 8:59am

At the very least, a QE-3 should be proposed. That would give the stock-market a shot in the arm. But frankly, until the debt-limit negotiations are over, ANY other economic "shot-in-the-arm" will be too little to make much difference.

- AllanL5

June 9, 2011 at 9:05am

The key here is the fifth paragraph. This proposed measure may be more of a political move than an economic one. The Republicans are always yammering about the need to lower taxes to help small businesses. If they oppose a bill that intends to do just that while at the same time pushing for the Ryan plan, which greatly lowers the marginal income tax rate for millionaires, their game will be exposed. It could even cause a lot of tea baggers to take notice and reassess their support for the GOP.

- DAVIDDREIER@EARTHLINK.NET-old

June 9, 2011 at 9:09am

It may help GDP and boost small businesses, but I think that this boost is going to get divided between investing in infrastructure and savings to make payroll cycles less cramped before hiring new employees. In fact, I think it will do more to keep employees from getting laid off from companies feeling the pinch than it will to generate new jobs. But that is not a bad thing as it would at least slow the rise of unemployment a bit.

- GSpinks

June 9, 2011 at 9:47am

rayward - it's true that the employee bears the cost of the employer payroll tax. But I don't think that an employer payroll tax holiday would lead to higher pay for employees. In the long-run - and under full-employment conditions - employers would need to pass the tax cut onto employees because market competition for employee services would drive up salaries. But when you have 9% unemployment, applicants aren't going to have two job offers at once, so they don't have bargaining power, and they don't get to bargain for a share of that tax cut. There is another positive effect we seek with a payroll tax cut - increasing overall employment (even if salaries themselves do not increase). If this were a permanent tax cut, then that could happen - employees would be less expensive, so some employers would make the decision to hire people who would not be marginally worth employing at the higher tax rate. However, if this is only a tax holiday, there aren't going to be many employers willing to bring on people who will no longer be worth keeping once the tax rate goes back up. It's just too expensive to hire and fire people. (I don't like the Republican "uncertainty" argument, but this is one case where a temporary measure is ineffective because everyone knows it's temporary.) So we don't get an increase in salaries. We don't get an increase in employment. We just get an increase in corporate profit - a transfer from government revenues to corporate revenues equivalent to the tax rate cut. And as we've seen, corporations are not spending their money right now, they're just sitting on it. So the economy doesn't benefit. Of course, I should say, I'm not an economist. I just play one on TNR.com. ;-)

- nr124831

June 9, 2011 at 10:16am

nr's analysis seems correct here, to me. Let's hope it's not, though, and Romer is right.

- Curran1

June 9, 2011 at 10:24am

I agree nr, though it's difficult to say since we don't know (for example) the duration of the "holiday" and any conditions that might be attached (such as new hires, an idea floated last time the payroll tax holiday for the employer was discussed), and one reason I included the final sentence in my comment. Ditto your final sentence; I was an economics major, but that was a long, long time ago. How long? Only one member of our faculty was a monetarist (a graduate of Chicago of course) and many had spent time in government as self-identified, and proud, Keynesians. It's amazing how times have changed, with "Keynesian" now being used in many quarters as an epithet along with "liberal".

- rayward

June 9, 2011 at 10:32am

nr, thanks for the depressing analysis.

- blackton

June 9, 2011 at 10:33am

Is our problem that wages are too high and businesses can't hire because of it? Or is it because businesses don't have customers? Sure it would be nice if the cost of an employee was less, but wouldn't the same money be better spent on infrastructure to jumpstart weaker parts of the country with global products, like a car industry here or an energy related company over there? I remember back in the day when they thought sending $600 to everyone would get things going. This sounds like that kind of thing to me.

- Nusholtz

June 9, 2011 at 11:48am

Nush - Our problem is that the Republicans failed basic economics and believe that supply creates demand, exacerbated by elected Democrats' definition of compromise-that being "to do what Republicans want." I really, really like Obama. I've put a lot of trust in him, and think he plays the long game better than almost anyone gives him credit for, but this headline would be more honest if it read, "Obama Considering Another Trip to Wishing Well to Fix Economy."

- janus

June 9, 2011 at 11:56am

As an economist by training, rayward's and NR's analyses of an employer payroll tax holiday are broadly correct. You can expect fewer layoffs as businesses make more money in the short run but nothing serious in the realm of new hiring because they know it's temporary and hiring is a long and expensive process. By contrast, an employee payroll tax holiday is the most stimulative of the tax cuts because it is spent on essentials by consumers pretty much immediately and boosts demand for businesses. As with the employer holiday, however, businesses know that it's a temporary demand boost and they do not hire much. The trick in true stimulus is to have a sustained demand boost, however achieved. Larger public works projects do the job because they usually take a long time to complete and the workers are buying things with their wages for the duration. In addition, these projects continue to spur growth after the fact in most cases because of their inherent utility to businesses (see: interstate highway system, Hoover Dam, etc). Defense spending is also highly stimulative because it's generally a multi-year production contract and military hardware is always destined either to be destroyed or become obsolete relatively soon which promises the very real possibility of more work down the line, keeping employees on the payroll. This type doesn't continue to stimulate after it's completed, however. Something to keep in mind about the stimulus of a few years back is that it seems people have forgotten that it was half tax cuts (at the insistence of Republicans). So really what we got was not a $787B spending bill but a $393.5B spending bill (mostly stimulative) plus another $393.5B in tax cuts (modestly-if-at-all stimulative). It should have been obvious that this would not make much of a dent considering most credible economists were suggesting spending on an order of magnitude above this. What they should have done instead was to revamp our entire crumbling interstate highway system and commission wind farms and other infrastructure projects plus prop up state and local employee payrolls. Yeah, it would have taken years to get this working but here we are now years later with stubborn unemployment.

- NR857175

June 9, 2011 at 12:01pm

Your notion about a larger stimulus is dotty, sub. And A, plumping for targeted tax cuts is not supply-side economics. You are practicing the fallacy of composition.

- liberalref

June 9, 2011 at 12:25pm

NR 124831 is exactly right. Romer ought to know better. It is not strictly the case that the stimulus has to be sustained by long-term projects, although those would be good for many reasons. Rather, the stimulus has to be sustained big enough and long enough for output capacity to be constrained. That is when businesses start hiring and investing, to meet demand that they cannot otherwise meet at the risk of losing market share to competitors. The upswing then becomes self-sustaining. The efficiencies we have gained in the recession are at least a good thing in the long-run as they lay the foundation for income growth. Now would be the perfect time for a very strong economic kick that presses output capacity. There is only one problem -- Republican wackos who continue to believe (or at least espouse) their absolutely incorrect, magic-fountain, supply-side economic nuttery.

- roidubouloi

June 9, 2011 at 12:38pm

GS, companies are mostly not feeling the pinch. The weakest are gone, the rest accommodate reduced demand with reduced employment. That's why profits are high even though the economy is weak. The weakness is principally reflected in unemployment.

- roidubouloi

June 9, 2011 at 12:41pm

Yeah, that's what I meant by sustained, roid. Not sustained indefinitely but long enough to cause a positive feedback loop.

- NR857175

June 9, 2011 at 12:52pm

Quite so, but it is not just about time. Size matters. With time, output capacity shrinks absent investment, and population grows. Eventually you hit the supply constraint point sufficiently hard that you get the positive feedback loop going. A sustained stimulus keeps you from drifting downward -- cuts off the negative feedback loop -- and gets you there quicker by narrowing the gap between demand and supply. But it doesn't necessarily get you there quickly. However, a LARGE and sustained stimulus gets you there much quicker, and then you don't need the stimulus at all. See, e.g., World War II.

- roidubouloi

June 9, 2011 at 1:10pm

To put it another way, for the same amount of stimulus in dollar terms, front-loading is better because it narrows the demand-supply gap much more quickly or could overcome it completely if, as in WWII, the government spending is large enough. A sustained moderate stimulus can still leave a pretty long time before the point of supply constraint is hit hard enough to start the positive feedback cycle going. Indeed, until you reach that point, calling it stimulus is really a misnomer.

- roidubouloi

June 9, 2011 at 1:14pm

Agreed on all points and I'd think that revamping the entire interstate highway system and building loads of wind farms would be large enough to accomplish this goal. But I'm certainly not a procurement specialist. In any case, it seems like we're thinking pretty much the same things and the issue was how it was communicated.

- NR857175

June 9, 2011 at 1:27pm

NR857175, my thing is mega regions, what Richard Florida promotes, for two reasons. One, my age; I grew up in the southeast before the interstate highway system and witnessed the total economic transformation that occurred once the system was built and the southest was opened up. Two, I can envision our own mega region in the southeast, Charlotte, Atlanta, Birmingham, NO, Charleston, Savannah, Jacksonville, Miami, Orlando, and Tampa, all connected by high speed rail. And it's easy to envision other mega regions. And the mega regions which would emerge by the construction of high speed rail would not only trigger a sustained period of economic growth but the development of other, more efficient means of local transportation, as people would no longer have to rely on expensive and inefficient automobiles for transportaion between cities within within the region and could replace those automobliles with more efficient electric cars for short trips. Of course, it's not going to happen. Instead, we hope for nonsensical things like payroll tax holidays. What would FDR and Ike think about the low expectations of today's "leaders".

- rayward

June 9, 2011 at 1:49pm

I can't really imagine our country without the interstate highway system so I can certainly see where you're coming from. High speed rail and the concept of megaregions would certainly reduce transportation costs and barriers to trade within the megaregion and also with all the megaregions in the high speed rail network. Put that on top of the stimulative effects of its construction, maintenance and operation and I'd say I'm a fan. Quick question: what is Florida's timetable for implementing this idea? Thing is, we tend to value individual transportation far too much in this country. I, personally, don't even own a car but purchasing a first car is viewed as a rite of passage for most teens in this country.

- NR857175

June 9, 2011 at 2:44pm

I think we are on the same page too, NR. Rayward, the mega-regions idea is a good one, but it requires a lot more thought because there is a complex relationship between transportation and flows of people and things. When you put a new system into a near vacuum, such as the original railway system and the interstate highway system, you can attract a lot of flows to the system right away. When you impose it on an already mature system, that does not necessarily happen and then you have a financial bust. More important for present purposes, the timing of this is far too slow to impact the current recession. We have an enormous build up of deferred maintenance on existing infrastructure, in the trillions, where we understand the technology and know what we need to do and where we need to do it. This would be a much better place to start. That and shipping money to the states to maintain and increase their hiring would go a long way. School aid distributed not to states but to local school districts with a sub-par local tax base, with the explicit purpose of equalizing per pupil spending between rich and poor districts, would be a huge boon too. Those people have enormous unmet needs of every kind. We would reap benefits no only in employment but in education. If other states are anything like New York, the maldistribution of public spending on education ought to be considered as racist and unconstitutional discrimination. But no one has the guts to take this on. Hence, the enormous inequities persist, with conservatives inveighing about the irrelevance of money to education while everyone who can spends what they can. (One wonders why in this case conservatives don't believe what the market is telling us.) Given the intractability of a solution on a state level, this is a perfect place for intervention by the federal government. Fine, you don't want to give adequate support to public schools in poor areas, we will do it for you and send you the bill, nationally. The equalization formulas would be governed by tax bases and real estate values locally so that there would not be shifting of costs between states.

- roidubouloi

June 9, 2011 at 2:59pm

I like the education equalization idea. I've always thought the system of funding public education via local property taxes was myopic in that it doesn't take into consideration the ratio between population and land value. It made more sense when the laws were enacted as the average differential wasn't as large as it is today but we're facing a very different scenario now and we need to adapt. Concerning conservatives not listening to market forces, I'm sure you're familiar with their skills at selectively choosing evidence. :)

- NR857175

June 9, 2011 at 3:19pm

"But it's true that Obama underplayed even his weak hand..." That about sums O'Bama up.

- IggyPop

June 9, 2011 at 3:41pm

While going to pick up my daughter from school, I have thought about how the school district equalization fund could work. You take the state average of taxable real estate per pupil and the average for each tax district. For the districts with a below average value, you impute the amount of real estate value that would bring it up to the state average. The federal government pays an imputed "tax" on that amount. In this manner, the adjustment is based on the local value, not the tax rate. If the district is willing to tax itself more heavily, then it shares the burden with the federal government. If it isn't, it gets less aid. This system creates a perverse incentive for districts to lower their assessed value and increase their tax rate. There is an incentive for the state to police this since a district that understates its value by more than other districts in the state would be taking away aid from other districts. However, the district still increases its aid at fed expense by having a notionally high tax rate. This can be corrected by audit. You take a random sample of properties in each district, have a full-value assessment done, and then compare the aggregate market value to the aggregate assessed value of those properties. You then re-state the value and tax rate for imputed full-market. That way, no district can get over on any other or on other states of the federal government. The federal government pays the subsidy based on the adjusted local tax rate and the missing adjusted market value. You still have to do something to prevent states from shifting state support to wealthier districts as a way of gaming the federal government. Lots of ways to do that including just prohibiting state aid that gives above-average per capita aid to any district with above-average per capita real estate value. If states want to allow poor districts to double dip by getting higher per capita state aid in addition to the federal subsidy, I say, let them. They can use it.

- roidubouloi

June 9, 2011 at 4:14pm

That's a good start but it creates a very large and unfunded liablity for the federal government absent some proposal on how to pay for the subsidy. I'm no deficit hawk but it's obvious to me that this would not be a small expenditure. As an alternative to a subsidy from the federal treasury, what about taking all the money from local property taxes that would go to school districts, pooling it together and then disbursing it to school districts on a per-pupil basis? This negates the difference in per-pupil spending entirely and creates no unfunded liability. The problem then is that localities will have incentive to lower property taxes and replace the revenue with other forms of taxation or simply reduce the percentage of property taxes that goes to school funding since the other localities will pick up the vast majority of the slack. I'm still trying to think of a way to counter this eventuality so perhaps it's not such a great alternative.

- NR857175

June 9, 2011 at 6:07pm

Tax cuts are unfunded liabilities. We're trying to spend money here to good effect. To avoid increasing deficits, raise taxes or print money. Some inflation would be a good thing right now. All that means is that the government ends up with a larger share of the economy. So what? The private sector is unable to employ all of our productive resources. Rather than let them go to waste, the government should employ them for our collective benefit. Repairing decaying infrastructure and ensuring that every child can get a good education are about as good a use for government spending as I can think of, improving our long-term competitiveness and output.

- roidubouloi

June 9, 2011 at 10:54pm

Yes, tax cuts are unfunded liabilities. So is the idea of filling the gap in local education funding with a permanent program using federal dollars with no plan to pay for it. One reduces revenue, the other increases spending. Tomato, tom-ato. It has nothing to do with the government/private sector share (which I see as irrelevant to most political and economic calculations) and, yes, some inflation would be good. Are you envisioning this as a short-term thing? In that case, I would agree that funding is not an issue and can be taken care of later. I was envisioning a permanent program, which would certainly need funding; the gap in education funding is a moral ill that needs to be permanently addressed. This distinction is obviously key because I, for one, and not willing to repeat the mistakes of the Bush administration and enact the financial equivalent of Medicare Part D.

- NR857175

June 10, 2011 at 9:34am

Tax cuts are not unfunded liabilities. Evidently there exists a topic where liberals have even less knowledge than economics -- accounting. The earnestness and stupidity do make for entertaining reading though.

- mr_rationale

June 10, 2011 at 2:53pm