Sunday, February 8, 2009

Oh, Wow! Please, Read and Discuss

I can across this article in my inbox via Portside. It's practically a gift-wrapped blog post for me! It discusses the economic stimulus and its racial implications.

But, before I paste it, I would like to mention another issue attached to the stimulus: the future. Watching CNN, a saw a few comments concerning the stimulus plan. (You know, CNN twitters now.) A couple of them were by guys in their mid20s complaining of the tax implications for them in the future. One surmised we'd be experiencing another recession 20 years from now due to the spending in today's package.

Now, I thought of a couple of responses to these assertions. First off was how incredibly selfish these two and anyone like them are to whine and complain about their future taxes when people are hurting right now. The second one is more for those who profess to be Christians. I wanted to remind them Jesus teaches us not to worry about tomorrow as today has enough problems of its own. But then, as I was writing this, it suddenly occured to me how illogical the arguments were. Are the mistakes of one generation paid by their children? Yes. But a recession due to taxes? I'm not sure that's ever happened so I really doubt it ever will.

But, yes, tomorrow's generation will pay for what we do or don't do today. I think it's best if we do something. Don't you? Cause seriously. If we don't get a handle on the situation, those of us in our mid20s may not have incomes to pay taxes on 20 years from now.

Selfish bastards.

So anyway, here an article by Dean Baker.
Spending Versus Tax Cuts: Who Pays the Cost of Political
Center for Economic and Policy Research
January 2009

President Obama and the Democratic leadership will
undoubtedly have to make some political compromises in
order to get a stimulus package through Congress.
However, it is important to keep in mind that there will
be real costs associated with these compromises insofar
as they result in a less effective stimulus package. A
less effective package will mean less economic growth,
which will, in turn, mean that fewer people will have

This paper calculates how the costs of a less effective
stimulus package will be borne. Relying on estimates of
the multipliers from various spending and tax measures
from Moody's, this paper projects the impact
on overall job growth and employment, as well as on job
growth and employment for African Americans and
Hispanics, of political compromises that lead to less
effective stimulus.

Table 1 below [moderator: please go to original article
to view tables] compares the projected impact of
spending increases to a temporary rebate of the payroll
tax or to a cut in corporate taxes. The assumed
multiplier for spending increases is 1.5, which is
approximately the average multiplier for the various
types of spending from Moody's The
multiplier for a payroll tax holiday was estimated as
1.29. The multiplier for cuts in corporate tax cuts used
in the table is 0.3. This is the estimated multiplier
for a cut in corporate income tax rates. This figure
might be a reasonable approximation for some of the
corporate tax cuts that the administration is reportedly
considering, however, it almost certainly overstates the
multiplier for one tax cut supposedly under

According to several reports, President Obama is
considering a measure that will allow firms to write off
losses in 2008 and 2009 against five years of past
profits, instead of the two years allowed under current
law. This change in the tax code would only help a
relatively small number of firms, disproportionately
banks and builders, who have very large losses. Unlike a
cut in the corporate income tax, which changes firm's
incentives going forward, this tax cut simply hands
firms money, without changing their incentives going

Therefore, there is little reason to believe that this
particular tax cut would lead to any noticeable increase
in investment. For this reason, a multiplier of 0.3
likely overstates the impact of this proposed tax cuts.

The table shows that $100 billion of additional
government spending will lead to an increase in GDP of
approximately $150 billion (about 1 percent of GDP at
current levels). Following the analysis presented by
President-elect Obama's staff, the table assumes that an
increase in GDP of 1 percent leads to an increase in
employment of 1 million workers. This means that $100
billion of additional spending will lead to 1 million
additional jobs, while a temporary cut in payroll taxes
will generate 860,000 jobs. By contrast, a $100 billion
cut in corporate taxes will lead to just 200,000 new

Using the assumption that a 2.0 percent increase in GDP
leads to a 1.0 percentage point drop in the unemployment
rate (Okun's Law), we can project that a $100 billion
increase in spending will cause the overall unemployment
rate to drop by 0.5 percentage points. A reduction in
the payroll tax of the same size will lead to a 0.4
percentage point drop in the unemployment rate, while
the same cut in corporate taxes will cause the
unemployment rate to fall by just 0.1 percent.

African Americans and Hispanics feel the effects of a
downturn (and upturn) disproportionately. Assuming that
unemployment for these groups tracks the overall
unemployment in the same way as it did in the last two
downturns,3 the $100 billion increase in spending can be
expected to reduce unemployment among African Americans
by 0.71 percentage points and among Hispanics by 0.67
percentage points. The payroll tax rebate lowers the
unemployment rate amongst these groups by 0.57
percentage points and 0.53 percentage points,
respectively. By contrast, the corporate tax cut will
lead to drops of just 0.14 percentage points and 0.13
percentage points, respectively.

Finally, the same comparisons can be made with
employment. The $100 billion increase in spending leads
to a 0.7 percentage point increase in total employment.
The payroll tax rebate increases employment by 0.6
percentage points, while the corporate tax cut leads to
an increase in employment of just 0.14 percentage
points. The effects of the employment of both African
Americans and Hispanics are 1.5 times as large.

This means that a $100 billion increase in spending will
lead to 1.05 percentage point increase in employment for
African Americans and Hispanics, while a corporate tax
cut of the same size will increase employment for these
groups by just 0.21 percentage points.

These projections indicate that insofar as tax cuts are
substituted for government spending, there will be fewer
jobs created by the stimulus and that African Americans
and Hispanics will feel this effect disproportionately.
Insofar as corporate tax cuts are substituted for
spending, the impact of a given amount of stimulus will
be only one-fifth as great. This sort of substitution
could lead to considerably higher rates of unemployment
for African Americans and Hispanics.

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