Stimulus Reality: Spending creates VASTLY more jobs than tax cuts

That is the title of a very thought provoking post over at OpenLeft. The author, Paul Rosenburg, takes data from Moody’s and combines it with research from the Center for Economic Policy and Research to create the following chart:

economic stimulus; tax cuts versus spending

It lends credence to Treasury’s call for tax cut’s to be delayed or reduced if government was not planning on cutting spending. But that’s not the real point of my post.

More importantly, it opens the door for a discussion on just what a NZ fiscal stimulus package should look like, and what sort of actions are likely to produce the most jobs. From the chart above, it seems to me that allowing SME’s to defer or even suspend provisional tax payments would be the only “tax cuts” worth considering. There is no doubt that we are about to embark on a huge debate of what constitutes “infrastructure” spending.

What do you think it should be?

MotherJones sums up their reaction to the chart quite well, but I’m interested in your opinions.

The takeaway? Food stamps, unemployment benefits, and infrastructure investment put the most money back into the economy for every dollar spent on them. Tax cuts for corporations and the wealthy do the least. (A payroll tax holiday, which is essentially a tax break for poor people, isn’t so bad.) Job creation maps similarly.

So when conservatives tell you that FDR’s public investment programs made the depression worse and that we need to hold fast to the conservative economic principles that created the current mess, shoot them this link.

Perhaps Mr Key should have a look at this chart too, before the infrastructure announcement due this week and the upcoming jobs summit.

Hat tip: Valis


10 Comments Posted

  1. But you haven’t provided any evidence to support your theory Frog.

    Why is it that Economists always produce large amounts of data, charts, tables etc but never provide any evidence to support their theory’s.

    Their is no difference between an Economic theory supported only by democratic agreement with in the field and the belief in the existence of God.

  2. Your table is very nice, Frog, but it is also very short-term. It is looking at change in GDP over a single year. It should be obvious to anyone with a modicum of economic knowledge that direct increases in government spending will provide a much bigger short-term increase than tax cuts – mainly because it is spending rather than paying down debt or saving, which is what mostly happens with tax cuts (at least initially).

    However, if you look at the same figures five years down the track, they will tell a different story, because government spending cannot be sustained without real economic growth. I predict New Zealand’s economy will be in a far better condition in five years’ time than The US, UK or Australia.

    in fact, there may actually be some money to spend when you guys get back into power in 2026. 🙂

  3. Oh, I love Mother Jones.
    Even have her name on my sneakers …

    It’s been well proven, to the point it was a feature of a lecture on social policy by MSD staff to my 300-level course a couple of years ago, that poor people spend a greater proportion of their income on consumables – so if you want to stimulate spending, it’s the poor who will spend, not the rich.

    The rich will take anything that isn’t part of their current household spending budget, and squirrel it away into investments that are performing well, despite the recession.

    As recommended by the DomPost’s financial writer’s, yesterday!
    9 Feb ’09, Page C4, business section “the Smart Money says ‘diversify'”, which won’t search & find on the stuff website….

  4. I agree that we should be looking at our own situation, what is most needed here. “Infrastructure” can have a myriad of definitions – it should be undertaken for the right reasons, i.e. it is needed not just wanted, and is sustainable and useful for the long term.

    I’m a Green and understand the call for urban public transport and long-distance rail, especially to and from ports, but in some places road upgrades are necessary too.

    One of the big ones is renewable energy systems – again, no blanket approach but a carefully thought-through analysis based on local resources and needs.

    Other big ones are waste management and keeping sewage out of waterways – these should not be left completely in the hands of local bodies, many of whom are not capable of doing it properly without some assistance from national government.

  5. The International Herald Tribune:

    “Japan’s rural areas have been paved over and filled in with roads, dams, and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s.”

    Public spending was so aggressive, it boosted Japan’s government debt to 180% of GDP – more than two times the current U.S. level. But did all that cement buy Japan out of its slump?

    You be the judge.

  6. Hello froggie. Albert Einstein said: “Never expect the people who caused a problem to solve it.” I don’t think Obama’s stimulus team knows what they are doing.

  7. Indeed, the problem with tax cuts as stimulus at the moment is that the national MPC is quite low at the moment, and they will be mostly saved. This will give the banks more money to lend, but at the moment they are (understandably) trying to increase their liquidity ratios, so will most likely not do so.
    So it’s no surprise that the multiplier is so low, as recognised by your figures.

    What’s even better than fiscal stimulus though is monetary policy. This is pretty widely accepted. In the US monetary policy is more or less impotent – interest rates are almost at 0. We’ve still got a way to go yet in New Zealand, however.

    If we do engage in fiscal stimulus, surely it should be based on New Zealand economic conditions, not just because everyone else is doing it?

  8. Tax cuts are immediate, whereas the insane US spending “stimulus” won’t peak until around the middle of 2010, with plenty more still to come after that. In other words, the bulk of those hundreds of billions is going to arrive too late to help the current situation, and will instead result in an even more dangerous bout of inflation after the event.
    Moreover, there is no way that the billions thrown at infrastructure can ever be spent prudently; there just isn’t the capacity to absorb that much spending. In fact, it would be better to burn those dollar bills – at least that way you wouldn’t be squandering real resources.
    Finally, tax cuts leave money in the hands of the workers who earned it. I know that’s anathema to you socialists, who would rather plunder the work force so you can spend our money on your pet projects.

    It is far from clear that any stimulus package would do any good in any timely fashion. Sometimes you have to just do nothing and let excesses unwind. The reason today’s recession is potentially so severe is that politicians kept inflating the economy rather than let these minor shake-outs occur. For the sake of their careers they didn’t want a recession to happen on their watch, so they kept on inflating the bubble. And now, for the same reason, politicians don’t want to be seen to be doing nothing – even when it’s the right policy – so they make a terrible situation even worse by coming up with these appalling “stimulus” bills.

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