Why the *Right* Kind of Tax Cut Can Provide the Economic Stimulus We Need

It's becoming clear that if present trends continue, Republicans will not only capture more than fifty House seats to gain a majority in that chamber, but mostly likely win the ten Senate seats needed to gain a majority in both houses of Congress.

That will lead to even more paralysis to combat the Great Recession (for many a Depression) than we currently have. It's imperative, given the political indicators and the economic ones that we get a huge second stimulus ASAP. Ben Bernanke and the Fed can't do enough on their own at this point, even if they try their hardest (which they probably won't.

In today's New York Times, David Leonhardt discusses the kind of tax cuts that would (and wouldn't) provide a boost to the economy. We agree and excerpt his column here (highlighting ours):

The great historical lesson of financial crises is that governments are usually not aggressive enough in responding. That was Japan’s mistake in 1990s, Herbert Hoover’s in the early 1930s and even Franklin Roosevelt’s in the mid-1930s.

In 2008 and 2009, political leaders looked as if they had learned this lesson. In 2010, they seem to have forgotten it.

Sometime in the next four months, Congress will have to decide what to do about Mr. Bush’s original tax cuts, because they are set to expire Dec. 31. Most Democrats favor extending the cuts for households making less than $250,000 a year. Republicans want to make all the cuts permanent, including those for households making more than $250,000.

Republicans argue that a permanent cut in tax rates is the best form of stimulus. Allowing any of the Bush cuts to expire, John Boehner, the top House Republican, said in a speech last week laying out the party’s economic agenda, is “a recipe for disaster.”

As theories go, this isn’t a bad one. You can certainly imagine how a tax increase on the affluent could hurt the economy or how a tax cut for them would lift growth. Theories aside, though, consider what has actually happened in the last three decades.

Mr. Bush signed his original tax cut in June 2001, when the economy had been losing jobs for four months. It then shed jobs for two more years. In the decade that followed the tax cut, economic growth was slower than in any decade since World War II.

If the goal is short-term stimulus, even Ronald Reagan’s much-lauded 1981 tax cut doesn’t appear to have worked. After he signed it, the economy lost jobs for 16 straight months. It didn’t start gaining jobs until after he had raised taxes, to reduce the deficit, in late 1982.

What explains this pattern? Tax rates matter, but people don’t make most decisions based primarily on their marginal tax rates. Mr. Bush’s and Mr. Reagan’s tax cuts were just not powerful enough to overcome the economic headwinds at the time.

Consumers and executives didn’t rush out to spend more money in part because they understood their tax rate would still be lower months or years later. That the Reagan and Bush tax cuts went disproportionately to high-income households, which save more of their income, did not help, either.

In fact, simply sending rebate checks to most households seems to have more punch. . . consumer spending bounced back in both the second quarter of 2008 (temporarily) and the third quarter of 2009. Those happen to be the quarters when the Treasury Department finished sending the one-time cuts from Bush and Obama.

Based partly on this history, Moody’s Analytics estimates that a new rebate would have about three times as large an effect on growth next year as would making all the 2001 tax cuts permanent.

Yet a rebate still isn’t the best solution, according to the Moody’s analysis or, for that matter, common sense. Some households will surely put their rebate into a savings account or use it to pay down debt.

That is why the ideal solution tries to leverage government dollars with private dollars. The cash-for-clunkers program did precisely this last year, causing a jump in vehicle sales. So did a 2009 tax break for corporate investment, leading to an end-of-year spike in spending.

The tension with such tax cuts is between targeting and simplicity. Targeted ones can avoid showering too much money on households and businesses that were going to spend anyway.

One possibility is an expanded tax credit for new clean energy projects, which is favored by the White House and by at least two Republican senators, Orrin Hatch and Richard Lugar. Another is an expansion of the tax credit for businesses that increase their work force, like the one sponsored by Mr. Hatch and Charles Schumer, the New York Democrat. This time, though, it would not have to be restricted to companies hiring the long-term unemployed.

The disadvantage of these programs is that people have to figure out if they’re eligible and then fill out forms. A simpler approach — but a less targeted one — would temporarily cut the payroll tax, which finances Social Security and Medicare and is paid by both businesses and workers. By suspending the part that applies to businesses for a few months, Washington could lower the cost of keeping or hiring workers.

Either way, a couple of tax cuts along these lines could make good additions to a bill extending the Bush tax cuts for households making less than $250,000 a year. Economically, the extra cuts would have a bigger impact than an extension of all the Bush cuts. Politically, this kind of bill would force opponents to explain why they instead wanted smaller tax cuts for middle-class families and businesses and a bigger one for the affluent.

Of course, no temporary tax cut will solve the economy’s long-run problems. That’s a harder project, one that involves upgrading the skills of the work force, slowing the growth of health costs, reducing the deficit, lifting exports, restarting healthy wage growth and, yes, simplifying the tax code.

But we won’t make any of those tasks easier by falling into a double-dip recession or enduring months more of halting growth. The aftermath of a financial crisis is usually difficult. It’s not yet time to declare victory.

Why Reviving Revenue Sharing Would Be Good for America -- and Arizona

The number one issue of this campaign, and of the last couple of years of the Great Recession, is how to get our economy moving again. Right now, policy makers seem paralyzed by outdated notions, fear, and political dissent by those like Jeff Flake, who are wrong, wrong, wrong about everything.

Jeff Flake and the Republicans' solution to our economic crisis and terrible unemployment is their usual laissez-faire, trickle-down, supply-side, yada yada crap that started us on the path to extremes of wealth and poverty but mostly great gains for the very, very richest of Americans and bupkis or losses for the other ninety percent and more of us.

Their solution to everything is to cut government spending (which they certainly failed at spectacularly during their years of federal control in the Bush adminstration) and lower taxes: Grover Norquist's "Starve the Beast." Because Jeff Flake - although he's got his sinecure right in the middle of it - hates the federal government and thinks it can do nothing.

So when the Republicans take control of Congress, and if they gain the White House in two years, will drastically cut out needed spending just as they opposed the stimulus. Yesterday we reprinted a column by Laura Tyson explaining why the first stimulus did work but was too small to be effective in such a virulent Great Recession caused by a major financial catastrophe and why we need a second stimulus.

Today we post a column, from the Business section of yesterday's New York Times, by economist Robert J. Shiller on one form the stimulus can take, "The Case for Reviving Revenue Sharing." Revenue sharing is something that even conservative Republicans should like because it takes decision to the state and local level, but real fanatic extremists like Jeff Flake can never be satisfied in their irrational hatred of government at all levels. (We wonder if Jeff Flake's toilet training caused his psychological problems.) Herewith, Shiller's proposal:

PROTRACTED unemployment is eating away at millions of people. And the economy’s failure to create enough jobs for them is part of a vicious circle that could keep turning for years to come.

In my last column, I called for big, temporary government programs aimed directly at putting people back to work. But how might we best accomplish this? The clock is ticking, and we don’t have time to create new national organizations to employ people. Instead, the most efficient approach is to use existing organizations for specific ideas and projects.

State and local governments as well as nonprofit and other organizations need to be mainstays in this effort. We need to enlist their help — without telling them exactly what to do. As for a framework, think of the general revenue sharing program adopted by Congress in 1972.

In his 1971 State of the Union message, President Richard M. Nixon advocated general revenue sharing to offset the tendency for power to be concentrated in Washington. Give local governments the money and “put the power to spend it where the people are,” he said.

Support for the idea was not confined to Republicans. A leading Democrat, Senator Hubert H. Humphrey, supported it in 1972, saying that federal taxes were more progressive than state and local ones and that federal money could be spent more effectively by people with local knowledge than by “some agency head in Washington.”

General revenue sharing came under attack in the Reagan years, and Congress ended it in 1987, arguing that by breaking the link between taxation and local needs, it encouraged higher taxes.

We are in a different time now. State and local governments are in severe fiscal trouble, and their constitutions often prevent deficit spending. In these circumstances, the federal government, which does not face such constraints, needs to raise revenue for them.

Legislation providing the states with $26 billion, which President Obama signed into law this month, took an important step in this direction. It did not create true general revenue sharing, because it tied the funds to specific needs — mostly hiring teachers and paying for Medicaid. But it did free states to use other resources as they saw fit.
(Illustration by David G. Klein)

It is time to bring back true general revenue sharing — temporarily — to stimulate the economy. Hundreds of articles in political science and public policy journals have studied past efforts, and analyzed the concept of fiscal federalism, without establishing general revenue sharing as a fundamental pillar of Keynesian stabilization policies. This lapse is understandable: most of these articles were written before the current economic crisis, the most serious since the Great Depression.

The need for a Keynesian revenue-sharing program is clear. After Congress approved stimulus legislation in 2009, Lawrence H. Summers, head of the National Economic Council, said that “it’s harder to spend $300 billion within a year on quality projects than you might think.” And no wonder the task was tough: decision makers in Washington were removed from local needs.

Martin Shubik, a professor of mathematical institutional economics at Yale, has proposed creating a “Federal Employment Reserve Authority,” a permanent agency that would do extensive research and maintain a detailed list of ready-to-go public works projects should a recession come. That’s a great idea, but we do not have such an agency now, and, if we did, it might still suffer from a Washington bias.

Now, local governments are laying off a wide variety of employees, including teachers, police officers and social workers. So why don’t we embrace general revenue sharing? Unfortunately, when faced with a need for stimulus, members of Congress seem to prefer to start their own projects, for which they are likely to get more credit from voters. Local governments, meanwhile, which are more likely to know where spending is really needed, remain in deep trouble.

It’s time for the public to assert loftier expectations. We need to respect existing government bureaus and organizations for their ideas, and get down to the business of financing important jobs temporarily, and on a huge scale. This will avert more layoffs, and perhaps give cities and states time to recover to the point they can pay local employees from local revenue.

When the administration of Franklin D. Roosevelt began its vast job creation program in 1933, it had to accept certain practical realities, which limited the immediate stimulus that could be provided. Foremost among them was that the government had to work largely within the framework of existing organizations — whether state and local governments, the military or nonprofit groups — which provided much of the economy’s infrastructure.

Economic stimulus is not a matter of turning on the money spigot, as some economists are wont to describe it. It is about getting the widespread cooperation of dispersed organizations to provide jobs, at least for as long as the economy is weak.

When the Roosevelt administration and Congress created the Civilian Conservation Corps in 1933, it was done within the framework of the Army. There seemed to be no other organization that could move hundreds of thousands of young men into wilderness encampments where they could work on conservation efforts. But the Roosevelt C.C.C. placed no more than a half-million people in jobs. We need to reach further than that.

Labor unions, which represent workers who naturally fear displacement by people in new jobs, might seem to be an obstacle. But unions do have an idealistic base, and working union members have sons and daughters and friends and relatives who are unemployed. The unions need to be consulted if new jobs are to be created in a relatively nonthreatening way. In a savvy move, President Roosevelt made a union leader the head of the C.C.C.

The concept of general revenue sharing can also be extended to the nation’s nonprofits, including charities and foundations. The government has long given support to such organizations, but usually in the form of narrow grants. But broader general revenue grants could be made in times like these.

Millions of people need jobs, and there are organizations that could help put them to work. It’s time to move forward.

Why We Need a Second Stimulus - and Why Radical Laissez-Faire Conservatives Like Jeff Flake Were Wrong About the First One

Today we'd like to reprint today's New York Times op-ed by Laura Tyson, the Berkeley economics prof and former chairwoman of the Council of Economic Advisers and the National Economic Council. We agree with her totally as to "Why We Need a Second Stimulus" (emphasis ours):

OUR national debate about fiscal policy has become skewed, with far too much focus on the deficit and far too little on unemployment. There is too much worry about the size of government, and too little appreciation for how stimulus spending has helped stabilize the economy and how more of the right kind of government spending could boost job creation and economic growth. By focusing on the wrong things, we are in serious danger of failing to do the right things to help the economy recover from its worst labor market crisis since the Great Depression.

The primary cause of the labor market crisis is a collapse in private demand — the same problem that bedeviled the economy in the 1930s. In the wake of the financial shocks at the end of 2008, spending by American households and businesses plummeted, and companies responded by curbing production and shedding workers. By late 2009, in response to unprecedented fiscal and monetary stimulus, household and business spending began to recover. But by the second quarter of this year, economic growth had slowed to 1.6 percent, according to a government estimate issued Friday. Clearly, the pace of recovery is far slower than what is needed to restore the millions of jobs that have been lost.

Households and businesses are on a saving spree to rebuild their balance sheets. Their spending relative to income has fallen more than at any time since the end of World War II. So there is now a substantial gap between the supply of goods and services the economy is capable of producing and the demand for them. This gap is starkly reflected by the 23 million Americans who are looking for full-time jobs and the millions more who have left the labor force because they could not find one.

The situation would be even worse without the $787 billion fiscal stimulus package passed in 2009. The conventional wisdom about the stimulus package is wrong: it has not failed. It is working as intended. Its spending increases and tax cuts have boosted demand and added about three million more jobs than the economy otherwise would have. Without it, the unemployment rate would be about 11.5 percent. Because about 36 percent of the money remains to be spent, more jobs will be created — about 500,000 by the end of the year.

But by next year, the stimulus will end, and the flip from fiscal support to fiscal contraction could shave one to two percentage points off the growth rate at a time when the unemployment rate is still well above 9 percent. Under these circumstances, the economic case for additional government spending and tax relief is compelling. Sadly, polls indicate that the political case is not.

Two forms of spending with the biggest and quickest bang for the buck are unemployment benefits and aid to state governments. The federal government should pledge generous financing increases for both programs through 2011.

Federal aid to the states is especially important because they finance education. Although the jobs crisis is primarily a crisis of demand, it also reflects a mismatch between the education of the work force and the education required for jobs in today’s economy. Consider how the unemployment rate varies by education level: it’s more than 14 percent for those without a high school degree, under 10 percent for those with one, only about 5 percent for those with a college degree and even lower for those with advanced degrees. The supply of college graduates is not keeping pace with demand. Therefore, more investment in education could reduce both the cyclical unemployment rate, as more Americans stay in school, and the structural unemployment rate, as they graduate into the job market.

An increase in government investment in roads, airports and other kinds of public infrastructure would be cost-effective, too, as measured by the number of jobs created per dollar of spending. And it would help reduce the road congestion, airport delays and freight bottlenecks that reduce productivity and make the United States a less attractive place to do business. The American Society of Engineers has identified more than $2.2 trillion in public infrastructure needs nationwide, and a 2008 study by the Congressional Budget Office found that, on strict cost-benefit grounds, it would make sense to increase annual spending on transportation projects alone by 74 percent.

Over the next five years, the federal government should work with state and local governments and the private sector to finance $1 trillion worth of additional investment in infrastructure. It should extend the Build America Bonds stimulus program, which in the past year has helped states finance $120 billion in infrastructure improvement.

The federal government should also create and capitalize a National Infrastructure Bank that would provide greater certainty about the level of infrastructure financing over several years, select projects based on rigorous cost-benefit analysis, invest in things like interstate high-speed rail that require coordination among states and attract private co-investors in projects like toll roads and airports that generate dedicated future revenue streams.

But can the government afford this additional spending? The answer is yes. Despite the large federal deficit, global savers, including savings-hungry American households, are snapping up United States government securities at very low interest rates. And they will continue to do so as long as there is ample slack in the economy and inflation remains subdued. Over the next few years, there is little risk that federal deficits will crowd out private investment or precipitate a crisis of confidence in the American government, a spike in American interest rates or a sudden drop in the dollar.

On the other hand, as long as private demand remains weak, the risk is uncomfortably high that trying to reduce the deficit — by cutting spending or increasing taxes — will tip the economy back into recession or condemn it to years of faltering growth and debilitating unemployment. In fact, either outcome would depress tax revenue and could mean larger deficits.

Faced with these risks, as long as the economy is operating far below potential, policy makers should do two seemingly contradictory things. First, they should provide additional fiscal support for job creation and growth. And, second, they should enact a credible multiyear plan now to stabilize the ratio of federal debt to gross domestic product gradually as the economy recovers.

By easing capital market concerns about the government’s future borrowing needs, such a plan would permit larger deficits and slower debt reduction while unemployment is still high. The long-run debt problem — the result of imprudent fiscal decisions before the recession, escalating health care costs and an aging population — must be addressed once the economy has recovered. But for now the priorities of fiscal policy should be jobs and investment.

That's not going to happen with laissez-faire out-of-touch corporate lackeys like Jeff Flake controlling Congress.

But most of you in the East Valley - even if you're out of work or your house is underwater or in danger of being foreclosed - are just too stupid to realize it, and that's why you vote Republican against your own interests. East Valley voters are largely the stupidest people on the planet Earth. (They're ugly, too.)

Arizona's Compassion-less Clueless Camera-Hoggin' Congressman Jeff Flake Blocks Economic Recovery - But Here's How to Fight This Entrenched Politician

How does a regular little guy fight entrenched power?

Arizona's Sixth Congressional District has a career politician Congressman, the fanatic Jeff Flake, who's standing in the way of full economic recovery and laughing in the faces of working people in the East Valley and all over America.

With his assaults on labor and working families, his outlandishly regressive tax policies and his slavish devotion to corporate power, this captive of K Street lobbyists Flake is blocking any attempts by the federal government to stop this onerous economic Great Recession.

In fact, he's happy about it. It's laissez-faire capitalism at its finest, says the foolish or fiendish Flake. Now his starve-the-beast philosophy of fiscal austerity and do-nothingism has spread, and we can't do any more stimulus or even help those who are under water, unemployed or struggling to pay bills like so many of us in the East Valley.

But here are three suggestions to go around our career-politician congressman:

First, Congress should grant workers a temporary holiday from the forced savings program known as Social Security.

To stimulate the economy now with no long-term increase in government debt, Congress should therefore temporarily exempt a portion of wages from the Social Security taxes imposed on workers; at the same time, those exempted wages would not be credited in computing that worker’s future retirement benefits.

For example, a 40-year-old earning $50,000 and paying annual Social Security taxes of about $3,000 could see those taxes cut to about $2,000. The added $1,000 in his paycheck, along with similar amounts for other workers, could be a huge stimulus to the economy.

In the future, of course, there would be a price to pay: the growth in that worker’s retirement benefits would be slightly reduced — much as if he had taken off four months without pay.

But the emphasis should be on “slightly.” Because benefits are typically paid over decades, the cost of a temporary $1,000 tax cut would be spread over many years; it could amount to a reduction in annual pension benefits of less than $100. The holiday could even be limited to workers under the age of 55, to allow plenty of time for them to salt away a few extra dollars for retirement once the economy improves.

Best of all, the costs and benefits would be matched to each worker. Those who get a pickup today would pay it back later on. This way, the Keynesians would get their stimulus, and the deficit hawks [like the predatory oddbird Jeff Flake] could sleep better at night.

Second, we need to block heartless, heedless, headless politicians like Jeff Flake from denying those who can't find jobs some relief.

Congress should restore the automatic triggers in unemployment compensation from the 1970s before nuts like Flake got in charge of the government (and they won't let go now, thirty years later!)

In 1970, Congress passed the Federal-State Unemployment Compensation Act, which established an automatic trigger: whenever unemployment increased to a certain point at a national or a state level, benefits were extended by 13 weeks.

The costs of these benefits were shared by the states, which paid them out of their regular unemployment insurance accounts, and the federal government, which increased taxes by about $8 per worker.

In the ’80s and ’90s, however, Congress diminished the effectiveness of the program by eliminating the national trigger, raising the state triggers and altering the trigger calculations in such a way that they hardly ever took effect

[Now], whenever a state’s total unemployment rate rises above 6.5 percent or jobless claims increase by more than 20 percent, benefits should be offered for an additional 20 or more weeks. This program should be fully financed by the federal government, thereby alleviating states’ burden during the recession.

An automatic trigger would provide a tailored response to those states with the worst labor markets and eliminate the need for Congress to revisit this issue every few months. Most important, we could reduce some of the uncertainty for the jobless.

Finally, Congress should allow small businesses to speed up the rate at which they can write off depreciating assets. Doing so would save employers money and spur entrepreneurial risk-taking, without increasing the national debt.

True, in the short term the government would lose tax revenue. But it is the same amount the government would lose by allowing the write-off anyway, just over a shorter period of time.

And there could be a fee for anyone using the accelerated schedule, equal to the interest the government would pay on the money it needed to borrow to cover its temporarily lost revenue.

Of course, Congress would want to make sure companies put their savings into new investments. To that end, it could devise a system for rewarding entrepreneurs based on the number of jobs per dollar depreciation created or the environmental worthiness of the project. And the accelerated write-off could be adjusted for specific assets across numerous industries, spurring development in areas where the public can most benefit, from new power plants to hospitals and nursing homes.

The tough part would be devising regulations and administering such a program. Politics is bound to intrude, though an independent review panel could help keep undue influence at bay.

Nevertheless, the reward for getting this policy right would be great — for government, investors, creditors and taxpayers — and it would encourage entrepreneurial enthusiasm throughout the economy.

With a little innovation and a lot of hard work (something our tropical-isle-vacationing congressman knows nothing about),

even before the voters boot out fishy fanatics like Jeff Flake, we can end this recession and put Arizona's working families in a better place.