Reporting on proposals to extend a stimulus program which benefited unemployed workers, Fox & Friends co-host Gretchen Carlson quoted Republicans to ask “when will the Obama administration turn off government spending and extend tax cuts to stimulate the private sector?” But economists agree that programs such as extending unemployment insurance have a far greater stimulative effect on the economy than extending the tax cuts, which may damage the economy in the long run.
Carlson advances Republican policy that “tax cuts...stimulate the private sector”
Carlson: “When will the government turn off government spending and extend tax cuts to stimulate the private sector?” On the September 29 edition of Fox News' Fox & Friends, co-host Gretchen Carlson introduced a panel discussion on ways to stimulate the economy by asking “Democrats want to extend a $1 billion New Deal-style program, it's part of the stimulus program and directly pays the unemployed. It's set to expire next week unless congress keeps it going. But Republicans want to know when will the Obama administration turn off government spending and extend tax cuts to stimulate the private sector?” According to the New York Times, the program that Carlson referenced “directly paid the salaries of unemployed people so they could get jobs in government, at nonprofit organizations and at many small businesses.” The program is set to end “next week,” which will cost the programs' beneficiaries their jobs.
In fact, extending Bush tax cuts estimated to have a long-term drag on the economy
Elmendorf: Extending the Bush tax cuts will “probably reduce income relative to what would otherwise occur in 2020.” In September 28 congressional testimony, CBO director Douglas Elmendorf noted that extending tax cuts will temporarily stimulate the economy, but will “probably reduce income relative to what would otherwise occur in 2020.” Elmendorf pointed out that the policy does not just affect government income, but will reduce the Gross National Product over the long term, because "[a]ll else being equal, lower tax revenues increase budget deficits and thereby government borrowing, which reduces economic growth by crowding out investment." Elmendorf confirmed that a “temporary increase in aid to the unemployed would have the largest effect on the economy per dollar of budgetary cost.” Elmendorf added to his testimony the following chart representing the long-term reduction in GNP from extending the Bush tax cuts:
Klein: "[E]xtending the tax cuts indefinitely would hurt the economy." In a September 28 post, Washington Post blogger Ezra Klein summarized Elmendorff's testimony by noting:
CBO Director Doug Elmendorf testified before the Senate Budget Committee today and dropped something of a bombshell. Extending the Bush tax cuts, he said, will “probably reduce income relative to what would otherwise occur in 2020.” The reason is simple: Debt.
So the bottom line is that extending the tax cuts indefinitely would hurt the economy. The less you extend the tax cuts, the less damage you do to the economy. And this goes for both the Democrats and the Republicans, whose tax cut plans are much more similar to each other's than to a plan that doesn't extend the tax cuts, or extends them only for a couple of years.
Extending tax cuts also does not provide a significant boost to the economy or create jobs
Reuters: “Economists of all stripes agree high earners are less likely to spend extra cash than less well-off peers.” In an August 17 “Factbox,” Reuters reported that the CBO and economists like Mark Zandi, who advised John McCain's 2008 presidential campaign, believe tax cuts for the rich are less stimulative than those for less wealthy individuals:
CONTENTION: There are more effective ways to stimulate the economy, where one can get a “bigger bang for the buck,” than keeping taxes low for wealthier Americans, proponents of letting the top two tax rates rise say.
FACTS: Economists of all stripes agree high earners are less likely to spend extra cash than less well-off peers.
A January report by the Congressional Budget Office, seen as a neutral arbiter of budget matters, measured the impact of various measures to boost growth and employment.
It found that putting money in the hands of lower-income earners by boosting aid to the unemployed or lowering payroll taxes is a significantly more efficient way to stimulate growth compared to putting more funds in the hands of those already well-off.
“There are just better ways to use the money,” said economist William Gale at the Brookings Institution.
Moody's Economy.com chief economist Mark Zandi, who advised Republican presidential candidate John McCain, backs this view but argues such programs could not make it through this Congress, which has fought bitterly to extend stimulus spending this year.
The influential Zandi advocates phasing out the low rates for high earners beginning in 2012, citing the fledgling recovery.
Krugman: "[T]here's a lot of evidence suggesting that tax cuts for the rich will do less to promote spending than equal tax cuts for the middle class and below." In a recent blog post, Nobel Prize winning economist Paul Krugman cited a 2001 Center for Budget and Policy Priorities report --written by former OMB director Peter Orszag and Nobel prize winning economist Joseph Stiglitz--on the effects of state tax increases vs. state budget cuts during a recession. Krugman noted: [T]here's a lot of evidence suggesting that tax cuts for the rich will do less to promote spending than equal tax cuts for the middle class and below." In the report, Stiglitz and Orszag wrote:
Since higher-income families tend to have lower propensities to consume than lower-income families, the least damaging approach in the short run involves tax increases concentrated on higher-income families. Reductions in transfer payments to lower-income families would generally be more harmful to the economy than increases in taxes on higher-income families, since lower-income families are more likely to spend any additional income than higher income families.
CBO: Extending tax cuts “does not create much incentive ... to hire more workers.” Elmendorf stated in his written testimony that "[d]eferring the scheduled increases in tax rates in 2011 would help some businesses" but that “increasing the after-tax income of businesses typically does not create much incentive for them to hire more workers in order to produce more, because production depends principally on their ability to sell their products.”
CBO scored "[d]eferring the scheduled increases in tax rates" as the lowest-scoring policy proposal to stimulate economy. In a January 14 report on “Policies for Increasing Economic Growth and Employment in 2010 and 2011,” CBO stated:
[P]olicies that would temporarily increase the after-tax income of people with relatively high income, such as an across-the-board reduction in income taxes or an increase in the exemption amount for the AMT, would have smaller effects [than other options] because such tax cuts would probably not affect the recipients' spending significantly.
The report further stated that “a permanent extension [of the Bush tax cuts] would entail large revenue losses after the recovery is over.”
According to a table in the report, CBO estimated that reducing income taxes in 2011 would have the least stimulative effect of the policy options considered.
Whereas extending unemployment insurance stimulates GDP growth, job creation
Zandi estimate: “Extending UI benefits” far more beneficial than extending Bush tax cuts. In his July 24, 2008, House testimony, Mark Zandi, Moody's Economy.com chief economist and a former adviser to John McCain, rated “Fiscal Economic Bank for the Buck,” defined as “One year $ change in real GDP for a given $ reduction in federal tax revenue or increase in spending.” “Extending UI Benefits” was estimated to create a $1.64 increase in Gross Domestic Product for a $1 investment. By comparison, “Mak[ing] Bush Income Tax Cuts Permanent” increased the GDP by $0.29 for every $1 invested. The Economic Policy Institute created the following graphic based on Zandi's figures:
CBO scores “increasing aid to the unemployed” as more effective than “reducing income taxes.” In a January 14 report on “Policies for Increasing Economic Growth and Employment in 2010 and 2011,” the nonpartisan Congressional Budget Office (CBO) stated:
Policies that could be implemented relatively quickly or targeted toward people whose consumption tends to be restricted by their income, such as reducing payroll taxes for firms that increase payroll or increasing aid to the unemployed, would have the largest effects on output and employment per dollar of budgetary cost in 2010 and 2011.
According to a table in the report, CBO estimated that increasing aid to the unemployed would have the greatest effects on GDP per dollar of budgetary cost and the second highest cumulative effect on employment of the policy options considered.
Elmendorf: Policies such as unemployment insurance “have a significant impact on GDP.” In January 2009, CBO director Douglas Elmendorf testified:
Transfers to persons (for example, unemployment insurance and nutrition assistance) would also have a significant impact on GDP. Because a large amount of such spending can occur quickly, transfers would have a significant impact on GDP by early 2010. Transfers also include refundable tax credits, which have an impact similar to that of a temporary tax cut.
A dollar's worth of a temporary tax cut would have a smaller effect on GDP than a dollar's worth of direct purchases or transfers, because a significant share of the tax cut would probably be saved. The nonbusiness tax cuts in H.R. 1 would reduce revenues much more in calendar year 2010 than in calendar year 2009 because much of the reduction in taxes would be realized by households when they filed their returns in 2010.
CBPP: Unemployment insurance “money gets spent fast and its effects spread through the economy.” From an April 16 Center on Budget and Policy Priorities document:
Temporary increases in unemployment insurance benefits score high in “bang-for-the-buck” calculations of their economic impact as stimulus. The money gets spent fast and its effects spread through the economy. As a result of such policies, local businesses are less apt to lay off workers and cut back on orders from their suppliers during a downturn; and in the early stages of a recovery, they are more apt to hire additional workers and step up their orders. Policymakers have always ended these emergency UI benefits once a strong and sustainable economic recovery is underway.
Joseph Stiglitz: Stimulus “should begin by strengthening the unemployment insurance system.” In a January 23, 2008, op-ed, Nobel laureate Joseph Stiglitz wrote that “America's economy is headed for a major slowdown” and that "[t]he country needs stimulus." Proceeding to describe the “optimal package,” Stiglitz recommended: “We should begin by strengthening the unemployment insurance system, because money received by the unemployed would be spent immediately.”
Blinder: “Extending unemployment benefits is one of the best forms of stimulus we know.” On July 2, NPR reported that former vice chairman of the Federal Reserve and Clinton economic adviser Alan Blinder “supports the effort to extend expiring unemployment benefits.” NPR quoted Blinder as saying: “Extending unemployment benefits is one of the best forms of stimulus we know.”
Martire: Stimulus from unemployment benefits “greater than any other fiscal action government can take.” In a June 30 piece in the State Journal-Register of Springfield, Illinois, Center for Tax and Budget Accountability Executive Director Ralph Martire wrote:
As for the contention that extending UI encourages people to avoid finding jobs so they can stay on the public dole -- well, it's just plain goofy. In May 2010, the private sector created only 41,000 jobs. That's 72,000 less than what's needed to keep up with the demand generated by natural work-force growth, much less creating the positions needed for the unemployed to find work. No one's thumbing a nose at getting hired to live in luxury eating government cheese -- there simply are no private sector jobs available.
Perhaps the hawks have forgotten that consumer spending accounts for more than two-thirds of the nation's economy. The best consumers are low- and middle-income folks, who don't earn enough to save, so they spend their paychecks. That is, when they have paychecks. See, if they've lost their jobs and the private sector isn't creating jobs and the feds cut off unemployment benefits, their ability to spend drops to, well, nil. Which is why the amount of private sector economic activity stimulated by unemployment benefits is greater than any other fiscal action government can take. In fact, dollar-for-dollar, it's five times more stimulative than the Bush tax cuts.
Sure, the long-term deficit has to be dealt with -- but honestly and responsibly. Short-term, deficit spending -- particularly on things like unemployment insurance, food stamps, housing assistance and the like -- is creating jobs and saving the U.S. economy from disaster.
EPI's Mishel explains why unemployment insurance is “such good stimulus.” In a June 10 hearing before the House Ways and Means Income Security and Family Support Subcommittee, the Economic Policy Institute's Lawrence Mishel testifed:
As I have explained, the only real option for increasing economic activity and consumer demand for goods and services is federal government intervention in the economy, specifically through more deficit spending. The safety net programs are a vital part of this picture.
The reason extending unemployment insurance is such good stimulus is that it gets money to people who are the most likely to have depleted their savings and thus tend to have no choice but to quickly spend essentially every dollar they receive on necessities found in their local economy. In other words, virtually every dollar spent on extending unemployment insurance benefits goes directly, and immediately, toward the purchase of local goods and services, providing an extremely efficient demand boost. Not only is extending and expanding UI benefits the right thing to do for the people hurt most by this economic downturn, it is also excellent economic policy.
CEPR's Schmitt: Unemployment insurance helps “sustain a community.” In an April 28 article, McClatchy Newspapers reported:
And allowing workers to fall off the unemployment insurance rolls can have negative ripple effects, said John Schmitt, senior economist with the Center for Economic and Policy Research.
“It hits individuals hard, but it also hits their communities, and more broadly the country,” Schmitt said. “Having unemployment insurance benefits can help sustain a community through a very difficult time.”