In two Defining Ideas articles in 2009, “Who’s Afraid of Budget Deficits? I Am” and “Furman, Summers, and Taxes,” I criticized Lawrence Summers and Jason Furman, two prominent economists who worked in the Obama administration, for their dovish views on federal debt and deficits. They had argued that we shouldn’t worry much about high federal budget deficits and growing federal debt. Of course, that was before the record budget deficit of 2020. Now even Summers is worried. In two February op-eds in the Washington Post, Summers argues against the size and composition of the Biden “stimulus” bill.
Summers makes a solid argument, on Keynesian grounds alone, that the proposed $1.9 trillion spending bill is much too large. He also, to his credit, digs into some of the details of the bill, pointing out how absurd they are. Had Summers looked at more details, he could have made an even stronger case against the measure. For instance, one major provision of the bill, the added unemployment benefits through August, will actually slow the recovery. And other provisions of the bill, like the bailout of state and local governments, are bad on other grounds. The fact is that this is not your father’s or your grandmother’s run-of-the-mill recession. It was brought about by two things: (1) people’s individual reactions to the threat of Covid-19 and (2) politicians’ reactions, in the form of lockdowns, to the same threat.
These are the opening two paragraphs of my latest article for Defining Ideas, “An Unnecessary ‘Stimulus’“, Defining Ideas, March 5, 2021.
And the ending:
First, the economy is recovering. In January, the International Monetary Fund predicted that real GDP will grow by 5.1 percent in 2021. Possibly that’s because the IMF understands that this is not a typical recession. The slump we’re in was due initially to people’s fear of the virus, a fear whipped up by Dr. Anthony Fauci and others. But now it’s due mainly to lockdowns. As the percent of the US population that has had COVID-19 rises and the number of people vaccinated rises, we are getting closer to herd immunity. Then people will feel even safer going out and governments will have fewer excuses to keep their economies locked down. We can all become Florida or Florida-Plus. That will all happen without any stimulus bill.
Second, the $1.9 trillion bill represents government taxing us or our children in the future to spend money in places where we the people have chosen not to spend it now. The bill is, in essence, a huge instance of central planning with government officials’ preferences overriding ours. The bill, for example, contains $28 billion for transit agencies, $11 billion in grants to airports and airplane manufacturers, and $2 billion in grants to Amtrak and other transportation. How does the government know that those are the right amounts? What if, as I predict, when the pandemic and lockdowns end we will still have fewer people wanting to ride transit because they and their employers will opt for a hybrid model of some at-home work and some in-office work? The effect of this misallocation of resources won’t necessarily show up in GDP because GDP measures government spending at cost rather than at value. But this spending will make us somewhat worse off. It’s far better to rely on people having the freedom to make their own allocations.
If the government gets out of the way, the economy will recover. Maybe it takes an outsider to see that and to say that. I just did.
Read the whole thing.
READER COMMENTS
Frank
Mar 6 2021 at 7:17pm
Even the name “stimulus’ is misguided. The simplest way of seeing things is as a combination supply shock and demand shock. On the demand side, we wish to keep people out of hunger and out of losing their abodes, for all this nonsense is temporary. On the supply side, we wish to keep firms afloat — with loans, not grants — and any shakeout can come later, for we do not now know which firms should go under. And yes, the policy toward COVID has negative supply side effects.
Thomas Hutcheson
Mar 7 2021 at 7:14am
To its credit, the bill is “billed” as “relief,” not “stimulus.” It only journalist who are calling it “stimulus,” probably not even realizing what they are implying.
The relief bill will not “stimulate” the economy beyond what the Fed can and seems likely to do anyway. Relief (leaving out investments in vaccination, testing and school opening, and some part of state and local aid) transfers income from some people to others, ideally from those least harmed by the pandemic to those more harmed.
The deficit created by these transfers — some not well targeted — will need to be covered by additional taxes, but we’re in need of a major tax increase to reduce/eliminate the structural deficits created by the GWB-DJT tax cuts for the rich, further improvement in the social safety net (child tax credit, EITC, health insurance), and the need to increase SS/Medicare revenues to equal expenditures, anyway.
David Henderson
Mar 7 2021 at 10:28am
You write:
Much of your statement reflects your values and, of course, people often disagree about values.
But you do make one empirical claim and that claim is false. You write that the Bush II and Trump tax cuts were for “the rich.” In fact, they were for everybody. We don’t have good data on tax cuts by wealth but we have reasonable data on tax cuts by income group. And both sets of tax cuts were roughly the same percent for each income group. That is, if people in income group A got, say a 10% tax cut, then people in group B, whatever group B was, got roughly a 10% tax cut.
Thomas Hutcheson
Mar 8 2021 at 6:24am
If Group A pays more taxes/capita than group B that would still mean that A’s taxes were cut more than B’s.
But given the ownership of shares (including through pension funds, etc.) how can the reduction in the corporate tax rate (great on intersectional efficiency grounds) not have disproportionately favored those with higher incomes?
Of course the difficulty in this kind of reasoning — yours and mine — is figuring out the “incidence” of the deficit created.
robc
Mar 8 2021 at 10:52am
On the other hand, the raise in the standard deduction would mostly benefit lower income.
If your itemization was still about that, which I might expect it to be for many of the wealthy (and even the high middle class like myself, but just barely) then that didnt benefit you at all. If you didnt itemize before, the very large raise in the standard deduction dramatically reduced taxable income.
And it had an affect at the state level too. Many states use the federal deduction by default, so state taxes got lowered also.
Michael
Mar 8 2021 at 7:12am
I agree with those who argue that this is more of a relief bill than a stimulus bill, although it does have some stimulus.
A couple of other things of note about the bill.
1. Where 65% of the benefit of the Trump tax cut went to the top quintile, this plan gives roughly equal benefit to each of the bottom 4 quintiles; the top quintile gets roughtly half the benefit of the bottom 4. At least according to data from the Tax Policy Center shown in this graph. Since the Trump tax cut included a huge and permanent cut in the corporate income tax, I assume there is some arguments about tax incidence that would lead some people to reach different conclusions about the distribution of benefit.
2. The vast majority of this bill involves moving cash around. Some of the most costly provisions are the direct checks, changes to the child tax credit, changes to the EITC, etc. This bill doesn’t create new programs the way Obamacare did, it doesn’t call for direct spending the way much of the 2009 Recovery Act did. It is almost entirely a redistribution bill.
It will put the argument that the best way to help poor people is to give them money to the test.
robc
Mar 8 2021 at 10:56am
What worries me is that the monthly child tax credit payment (did that survive that way?) is a trojan horse to a UBI. Get people hooked on the monthly check then say “we can do the same for adults too”.
I am opposed to a UBI. I am less opposed if it comes with (via constitutional amendment) the banning on **all** other transfer payments. But to have a UBI and other poverty programs too is a really, really, really bad result.
Michael
Mar 8 2021 at 11:42am
As a parent whose decision to have only one child was motivated partly (not completely) by finances, I think the expanded CTC is good policy.
I think the form it survived in was $3K per child with 50% availably as periodic cash payments.
I am favorably inclined towards a UBI, though it isn’t something I am wholly in favor of. A lot of the opposition strikes me as based on unjustified beliefs about the personal character of recipients that is contrary to recent evidence.
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