Christina Romer and Jared Bernstein’s January 9 report on “The Job Impact of the American Recovery and Reinvestment Plan” marshals an impressive array of theory and data in support of President Obama’s stimulus package.
Some of their tax analysis seems suspect, though. On page 5 they write, “tax cuts only have effects [on employment] when people go out and spend money.” Sounds reasonable enough. If people don’t spend money, they save it. And people save most of their tax cut windfalls.
But the only way for saved money to have no effect on the economy is to keep it under a mattress. And very few people do that.
Most people save their money in a bank. Or they invest it. The banks spend the money by lending to businesses and homebuyers. They in turn spend the money on their own projects. Companies receiving investment funds spend the money on salaries, capital, and so on. Saved money is still spent, you see. Just by different people.
There is no reason for saved money to create fewer jobs than spent money. Different jobs, certainly. But more or fewer? No compelling theory points in either direction. It depends on what it’s spent on.
The long-run effects of tax cuts are a little trickier. The stimulus package will increase spending. Deficits, too. So really, the tax cut… isn’t. Deficits have to be paid back. That requires higher future taxes. Lower taxes now mean higher taxes later.
Higher government debt also crowds out private investment. Every dollar that investors put in government bonds is a dollar not invested in the private sector. Hard to tell what the net employment effects are. Depends on what the investment opportunities are.
Maybe the stimulus package is a good idea. Maybe it isn’t; I have a strong hunch it isn’t. As regards tax policy, Romer and Bernstein’s report sheds little light.
Inertia Wins! 