Saturday, February 14, 2009

American Recovery and Reinvestment Act of 2009

Here you will find the transcript of questions and answers given during our president’s first press conference.

It seems that our president is taking the lead on promoting much more of a 'Keyenesian' style stimulus, with little interest in providing incentives through tax cuts.

“But as we've learned very clearly and conclusively over the last eight years, tax cuts alone can't solve all of our economic problems -- especially tax cuts that are targeted to the wealthiest few Americans. We have tried that strategy time and time again, and it's only helped lead us to the crisis we face right now.”

Of course tax cuts won’t solve all of our problems, but they are a very large part of the puzzle. While the package is including many types of tax rebates and credits, there is no indication that it will maintain the marginal tax cuts that Bush implemented early in his presidency. Nothing is mentioned about across the board cuts in corporate or capital gains taxes. History, economic theory, and empirical evidence indicate that in fact tax cuts for the very wealthy can be a very powerful tool in stimulating the economy.

Thomas Sowell provides data from the US Budget Historical tables ( I checked these ) indicating that with the Regan tax cuts, we saw revenue increases, not deficits or stagnation.

Lawrence Lindsey ( 1987) noted that for incomes greater than $200,000 per year, ( i.e. tax cuts for the rich) the Regan tax cuts lead to an increase in reported incomes and increased collections. For those earning > $200K per year, we saw the following increases in collections:

1982 – 3%
1983 – 9%
1984 – 23%

( see Lindsey, Lawrence B. 1987. “Individual Taxpayer Response to Taxcuts, 1982-1984.” J. of Public Economics 33 (July) 173-206 , also noted in: Robert Barrow. Macroeconomics- 5th Edition MIT Press 1997

And for the recent Bush tax cuts: ( see this from a recent WSJ)

"Taxes paid by millionaire households more than doubled to $274 billion in 2006 from $136 billion in 2003. No President has ever plied more money from the rich than George W. Bush did with his 2003 tax cuts. These tax payments from the rich explain the very rapid reduction in the budget deficit to 1.9% of GDP in 2006 from 3.5% in 2003." ( see historical tables link above )

Also, straight from the historical tables provided by the office of management and budget you will see that from 2004-2007 there was a 25% surge in tax revenues, ( in face of tax cuts) which was the largest 3 yr surge since 1966. ( again I checked the math)

Certainly ‘marginal’ tax cuts lead to increased economic activity and therefore increase tax revenues, both being remarkable indicators of success, not failure.

In another part of the press conference, President Obama seems unconvinced that there were problems with the New Deal policies implemented during the Great Depression:

“Now, you have some people, very sincere, who philosophically just think the government has no business interfering in the marketplace. And in fact there are several who've suggested that FDR was wrong to intervene back in the New Deal. They're fighting battles that I thought were resolved a pretty long time ago.”

However, many economists believe that Keynesian fiscal spending is the wrong answer to our problems, and that the interventions of FDR actually lengthened and deepened the depression in the 30’s. Below I provide the following links to supporting references.

Cole & Ohanion – recent (2004) research indicating FDR’s policies prolonged the depression

Cole & Ohanion
- previous published research, New Deal policies provided a 'negative shock' prolonging the depression.

Prescott: Published research -In the conclusion it is made clear that FDR's policies that made the depression ‘great’.

Barro - WSJ Notable and Quotable

Gary Becker - WSJ skeptical on fiscal stimulus.

Mario Rizzo on Keynes own admissions of fiscal stimulus limits.

Mankiw on how weak fiscal stimulus is vs tax cuts. (WSJ)

Barro more on the weakness of New Deal policies.


'John Cochrane, a professor at the University of Chicago Booth School of Business, says that among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is "taught only for its fallacies."
New York University economist

Thomas Sargent agrees: "The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research."

Mankiw lists a number of prominent economists opposed to the stimulus such as (omitting some I listed above) Alberto Alesina, Eugene Fama, Robert Lucas, Kevin Murphy, Harald Uhlig, and Luigi Zingales-

200 more economists ( again some redundancy) that believe that the stimulus package is based on flawed economics:

“Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we the undersigned do not believe that more government spending is a way to improve economic performance.More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.”

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