The problem with tax cuts like this is that people don't tend to spend that money, and as a result there is little impact on overall demand for goods and services. And this means that these tax cuts probably won't do much to stop the bad employment news that we've been seeing.
This point was illustrated for me today --- I was giving another talk on the economy downtown (similar to my last one, so no new slides to post here), and I made the point about people not spending their stimulus checks.
One audience member works for a local firm that is a collection agency; the kind that calls you when you get behind on your mortgage or your credit card payments. She said that when last year's stimulus checks went out, her firm saw a big increase in payments, and asked how this fit in with my claim that people didn't spend their stimulus checks.
This fits my point exactly. Rather than using the stimulus checks to buy NEW goods and services (which would then increase demand and help keep people employed), lots of individuals used their checks to pay off the debt they owed on goods and services they had already bought. So.... not the sort of thing that's going to lift us out of our 500,000 per month job loss cycle.
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4 comments:
Scott,
That's exactly what we did with our check last year...paid down our home equity loan. And if I get another check, I'll pay off my kid's braces. If there's any left over, it will go in savings since I have a commission based job and am uncertain about my own future earnings.
Jeff Z
The stimulus checks were spent. They were spent on past consumption. The stimulus checks are filling the hole left by contracting credit and reduced home equity. This hole has to get a great deal smaller before the consumer will resume spending on anything other than necessities.
By "spend" I mean "spend in such a way as to create short-run demand for goods and services." That's what will keep unemployment from rising to 10+ percent.
Sending a dollar to a consumer who pays down debt today and then is able to buy a TV in 2011 isn't going to make the recession any shorter.
And keeping the recession short is a good thing in the long run. Why? Because anyone who is unemployed isn't creating any goods and services. If we care about our long-run ability to grow our economy and pay down the federal debt, we need to think about how to make efficient use of all the productive assets we have. People sitting around umemployed is not productive.
Dr. Schaefer,
What about cutting corporate tax? Wouldn't that form of stimulus enter the economy at a more efficient rate?
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