A Couple Brief Thoughts On Stimulus

Just read this Economix blog post from David Leonhardt. A couple of brief points. First, from the beginning I remember everyone in favor of stimulus saying that it was aid to states and unemployment benefits that mattered. Everyone seemed to know that with the complexity of modern infrastructure that direct employment programs such as infrastructure spending were likely to have little effect. The small amounts given to that reinforces this. This is important to keep in mind when reading Glaeser's post which showed that stimulus had little significant effect. There were bigger factors in play, especially since government spending should be considered as a net of state, federal, and municipal, and with only the feds pursuing an expansionary policy it's unsurprising that analysis would be inconclusive since the federal spending was probably little more than background noise against bigger signals.

As a tangent, from following the link at the bottom of Leonhardt's post I came across this post from Kevin Drum. I think there is a very good reason that no one is seriously proposing tax cuts aside from what Drum suggests. While the common narrative is how sticky spending is, in practice I believe that with the exception of entitlements all spending is actually relatively easily changed and adjusted. Even entitlements aren't that hard to adjust marginally, though changing demographics swamp any effect policy is having.

What seems to be really sticky are tax cuts. Look at the problems over estate taxes and repealing the Bush tax cuts. It's possible but far more difficult to adjust taxes than it is spending with politics where they are now. This was probably less true in the past, someone had to raise the top bracket to 90% decades ago, but currently tax cuts are the stickier part of policy.

Yet somehow the idea that spending is stickier has stuck around despite the fact that this hasn't really been true since the 70s. Sure, we've been spending like drunken sailors but it has been on new programs (like wars) while we've been quite willing to take the hatchet to other programs as priorities have changed, like the moon program. The only discretionary spending that seems sticky right now is the military but that's a separate rant not tied to stimulus.

While we could surely pass tax cuts easily the problem will come with repealing them later, and a key component of calling something stimulus is that it is temporary. I believe the politics of winding down spending after the recession will be far easier than winding down tax cuts which, for me anyway, is a good enough reason to favor spending over tax cuts at the moment. Whether and how much we should be spending on stimulus is of course an entirely separate discussion.