Stimulus - The difference between tax cuts and government spending

Mark Zandi, chief economist at Moody's Economy.com, has prepared several analyses of the various stimulus proposals being discussed.

Looking at his latest, titled "The Economic Impact of the American Recovery and Reinvestment Act" (January 21, 2009), provides some interesting insights. The report is 18 pages long, but it's definitely worth a read.

One section I found particularly interesting is the table on page 9 of the report. This table documents the Fiscal Stimulus Bang for the Buck of various components to potential stimulus packages, such as differing types of tax cuts, increasing food stamps, and increasing infrastructure spending. The "bang" is measured in increase in dollar increase in GDP created by each dollar in stimulus spending of that type.

Surprise - increasing food stamp aid increases GDP the most - $1.73 for each $1 spent. Why would that be?

• The food stamp program already exists, so there is no need for "wasted" money to start the program.
• People who receive food stamps generally spend all financial aid they receive quickly.
• Food stamps assist not only those that fit the traditional notion of welfare recipients (chronically unemployed, single mothers, etc.) but also those that have run out of unemployment insurance aid or did not otherwise qualify for unemployment insurance (like part time workers, self-employed workers, etc.)

But wait - why should we spend all kinds of money on welfare recipients and unemployed people. He who does not work shall not eat, and so forth, right?

Putting aside the notion that it's a piece of right-wing mythology that this country is over-run with people that contribute nothing but live large off of government benefits, the answer is that because that spending is what is best for the country because we are assured the money will travel around in the economy. A dollar spent at Cub Foods (or whatever grocery store) is a dollar that the workers at Cub Foods get a piece of. It's a dollar that the people at Kraft Foods get a piece of. It's a dollar that farmers get a piece of. It's a dollar that the truckers that move the food from the farm to the store get a piece of. It works.

Now look at tax cuts. A $1 cut in the corporate tax rate gives us only a $0.30 boost in GDP. Why?

The corporation is not likely to spend it, especially given the current economic situation. Most would "save" it to shore up their balance sheets. Some may hire new workers - but here's the kicker. They don't have to hire US workers. The creation of jobs in India is not helpful for the US unemployment rate.

Without the stimulus package, Zandi estimates that the unemployment rate (today announced at 7.6%) will be over 11% in 2010. Even with the stimulus package, he estimates it will be 9%.

Republicans need to get out of the way of economic relief for this country, or they will pay a heavy price in the 2010 midterms. If filibuster after filibuster leads to unemployment of 11%, people will be waiting in lines of whatever length necessary to throw them out to end the gridlock.