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Saturday, January 24, 2009

Common Sense Stimulus

Conservatives assure us that the New Deal didn't work for supply side reasons; FDR raised taxes at the wrong time. Assuming this analysis is correct, what follows? Does this mean, then, that Conservatives ought to concede that the New Deal might have worked if taxes hadn't been raised? Liberals, for their part, offer that the New Deal -- while a success -- was nonetheless limited by FDR's failure to infuse the economy with enough cash, and at the right time (NYT's Paul Krugman is here paradigmatic). What does this mean? Their hedging suggests that an economic stimulus is not sufficient to recover from a recession. The economy has to be stimulated the right way.

From the 1930s to the 1960s. Here, JFK is often credited with helping pull the economy out of recession with broad tax cuts. Does this mean, then, that stimulus in the 1930s Keynesian sense is in fact not necessary? Supply siders shout this from the mountain tops. (I'm not sure how the Keynesian crowd treats this case; my guess is that they credit the recovery with exogenous factors, rather than the tax cuts.)

Anyway, the point is, economists -- supply and demand side -- weigh in with sound and fury about effective remedies to recession whenever one occurs, but I think the absence of anything approaching consensus on the well studied, historical cases speaks volumes. It seems that the experts don't really know. What to do?

For our current economic woes, I'd like to take a stab at what I'll call common sense economics. I suspect it won't please either side of the ideological divide. But perhaps it would work.

First, let's forget cutting taxes on the rich right now, since a broad consumer recovery will rely more on everyday purchasing. Cut the middle to lower middle class taxes -- from 15% to 10%, for instance, for the middle class. That larger paycheck will, eventually, start burning a hole in millions of American wallets, and soon the Average American -- much more numerous than the Rich American -- will be getting that flatscreen T.V. he's wanted, and will resume taking his dear wife out to dinner and a movie again.

Second, cut the payroll (FICA) tax on small businesses. We can then, many of us, meet payroll, instead of going further into debt, and with enough wind in the sails we'll hire that new employee that we so desperately need. Multiply this by thousands and thousands, and we've got ourselves moving toward recovery.

Finally, we can address demand side job creation. I'm not a demand sider, so whatever I add about this will likely sound hand-wavey, but how about this: if we're in such a serious bind, and we need to act now, let's take our printed money and pore it into projects that attract work for people now. The world will be vastly different in two years; accordingly, our horizon for understanding what needs to be done to stimulate the economy cannot extend very far. Jobs now. Common sense.

In short, I propose that we recharge consumer spending by stimulating the middle class, and get the small business engine revved up again with a temporary relief from the onerous payroll taxes, and we spend stimulus money on projects that get people working now. It'll make a difference. And no ideological wars required.


mijopo said...

"Does this mean, then, that the Keynesian project would have worked otherwise?"

I know that arguing that the New Deal failed is all the rage on the far right fringes these days, but is the consensus so strong that we can now freely commit the complex question fallacy with it? To the best of my understanding, most economists still think the New Deal was pretty much just what the doctor ordered and was essential for purposes of kicking the economy out of its downward death spiral.

Erik said...

"...can now freely commit the complex question fallacy with it?"

I don't follow. If the New Deal stimulus was causally efficacious in bringing about the recovery from the 1930s recession, then that shows no more than a sufficiency argument, and even then in the context of the 1930s economy. It hardly demonstrates that such approaches are necessary. On this line, JFK initiated broad tax cuts in the 1960s that are credited by many as pulling the economy out of the recession of that era. How do we parse this? Are tax cuts sufficient then too? To me, it's all not quite clear...

mijopo said...

I read ""Does this mean, then, that the Keynesian project would have worked otherwise?" as an assumption that it didn't work.