Is any bit of positive fiscal impulse worth the money?

December 26th, 2016 at 9:26 am

I’ll be brief because I’m on vacation this week in an undisclosed location, but the hotel has solid wifi and the family’s still snoozing away, so let’s quickly talk a bit of fiscal impulse (FI).

The discussion starts with ‘G’ in the GDP identity: Cons+Inv+Gov’t+Net Exports. An increase in G raises GDP, all else equal, and that’s positive fiscal impulse (FI). It’s nothing more than “the delta”–the change–in fiscal policy from one period to the next.

What can be confusing to people is that it’s not the level, it’s the change. So, if you’re stimulus program spends $150 bn in year one and $100 bn in year two, FI in year two is negative.

I raise this because I’m encountering progressives who are compelled to be at least somewhat supportive of wasteful, regressive tax cuts, like those proposed by Trump, or the ones I just wrote about in Kansas, that happen to spin off some positive fiscal impulse. While we’re closing in on full employment, there’s still slack in the job market, such FI could help absorb remaining slack.

That’s true, but there are two relevant questions: bang for the buck (multipliers), and the impacts of the cost of the tax cuts.

The Kansas cuts–particularly the zeroing out of the pass-through income–are instructive as these cuts have very low bang-for-buck in terms of jobs or incomes for middle and lower income folks. They just lower taxes for those who are already “highly liquid,” i.e., they’ve got a bunch of money already and giving them more shouldn’t be expected to boost spending (C) or investment (I) much. And since states must balance their budgets, they constrain G as well.

In terms of poor targeting, Trump-style cuts are similarly lame in terms of growth effects, as I discussed recently re the GW Bush tax cuts in the early 2000s. However, because they involve deficit spending–as I’m sure you’ve seen, the federal gov’t can run deficits–they will generate some positive FI, which we could use.

But at what cost? The opportunity costs are twofold. First, there’s the cost of tapping small versus larger multipliers: were team Trump to spend the money on infrastructure or target those with high consumption propensities, the FI would be stronger (btw, it should be noted that multipliers are smaller when the Fed’s raising rates, albeit slowly and by small increments, than when they’re lowering them).

Second, “permanent” tax cuts will mean a worsening of the revenue shortfall I’ve long worried about (the scare quotes are there because the R’s may build some BS cliff into their tax plan to accommodate arcane budget rules, but the intention is permanence). That will provide an excuse for whacking Medicaid, Medicare, Social Sec, and much other spending that’s important to the poor and middle-class. And yes, those folks are income constrained, so that part of ‘G’ gets spent and feeds back into growth.

To be clear, I’m not worried about higher budget deficits because I fear they’ll crowd out private borrowing and lead to higher interest rates. That’s not at all my reason for opposing a big tax cut. And I’m confident that even a highly regressive cut will generate some needed FI.

My reason for opposing such cuts, in the nation or in the states, is that they do little to boost demand and they whack desperately needed revenues. And while I recognize the argument that “hey, this is the best we’re gonna get from team Trump,” I will not go gently into that good tax fight.


Hey, I’m #10 on this list of allegedly influential economists. I’ve got no idea what that means, but I’ll take it!

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6 comments in reply to "Is any bit of positive fiscal impulse worth the money?"

  1. Smith says:

    Krugman may be on top of this list, but he spends most of his time these days tweeting and retweeting
    Occasionally, he still has something interesting to say, even when he’s wrong.
    Analytics of Trade Deficits and Manufacturing Employment (Very Wonkish)
    He closes
    “Bottom line: yes, trade deficits reduce manufacturing production and jobs. They played a significant although far from dominant role in manufacturing job losses after 2000.”
    This paper offers and alternative interpretation finding the trade deficit dominant due to evidence that includes interesting observations about ways productivity is over stated (computer and electronics, should moores law really translate into dollars? is my MacBook really 100x better than my 386 if it’s 100x faster?)

    Oh, and the tax cuts, and pass through, etc. The obvious way to attack tax cuts is to rail against imprudent Republicans blowing up the deficit and piling on debt. Cut the billionaire’s taxes and the middle class will pay for it. Sell that. What’s so hard about that? Clinton couldn’t because she was in bed with them, even if her program would have raised taxes 5% on those making over $5 million. If you made $10 million Clinton taxed you an additional $250,000, you kept $5.75 million instead of $6 million. In 1963, you kept $1.1 million.

    • Smith says:

      Your friend Dean Baker makes the same point I do above, in his blog post from today, Dec 29 (so I beat Beat the Press to press on this one as far as most current debate)
      He cites earlier work of Susan Houseman which is extensively cited in the link I gave, which is also referenced by Houseman in her later work.
      Link from Baker’s post:
      Good to know the substance of that paper is validated by another economist, and interesting to note the cross references and Houseman’s original work.

      However, when Krugman and George Will are in near agreement on something, that can’t be a good sign, especially for those still paying attention to Krugman (readers, politicians, economists). Krugman also has much more influence than Will, an order of magnitude to say the very least.

      I guess he’s too powerful for anyone to pick up the phone and say, “what about this”.

      It makes a huge difference whether you think trade was dominant in destroying manufacturing jobs, at least it did to 11,000 in Michigan, 23,000 in Wisconsin, and 45,000 in Pennsylvania

      Too bad a prominent economist advising Clinton got that wrong.

  2. nobody says:

    I don’t care if this is published.

    Yes, Obama would have been reelected if he could run. Would this be good? Probably not. We need to recon with our demons as a country, and Obama is kicking that can down the road.

    More importantly and pertinently, the question is what to do with Trump. He’s clearly wrong on Israel and Iran. I applaud Kerry for his stand. I wish it came stronger and earlier.

    But neither side will get my vote until the trade problem is resolved. I’m sick and tired of prominent economists playing dumb on our ‘trade’ problems. Globalization is not the same as textbook trade. Globalization has ruined lives, destroyed cultures, and created military conflict.

    Money and wealth in the US are evil forces. The US has become the single biggest destabilizing force in the world. A close second is the money and wealth of Germany.

    Can the people in power come to grips with these problems? I believe Obama did. Can Trump? Probably not. However, Trump was elected for a reason, and that reason is to fix horrible trade ideas and globalization fascism.

    I fear Biden doesn’t really understand the globalization problem. He means well, but it is time for a new generation of Democratic leaders. These leaders must be more empathetic towards the opposite party. If you cannot empathize, you cannot lead with a conscience.

    The Democratic party must drop the demand for PC speech. It must stop trying to disqualify or discredit people because of a single statement or even a single position. It must open dialogue with all groups, and this includes those it deems ‘deplorables’.

    This statement by Hillary was the single most telling and destructive statement of our time. It is telling because this theme was permitting Europe as well, and it is just a general theme among the elite world class members. She would have been a horrible representative for American citizens.


    • Smith says:

      It’s hard for me to criticize a comment as off topic, political, and self congratulatory, when my own comment is nearly so, (more so in congrats department). The distinction, though small, is that I did address the subject of the post, tax cuts, and I introduced the subject of trade in relation to Krugman’s recent economic blog, tangentially associated because of the influential list.
      Moreover I stuck to economic arguments and hit politics in terms of framing the issue of tax cuts and critiquing Krugman’s take on the trade issue (claims not dominant).

      For all your comments, the only new piece of information I got from them was accidental. Consider the Podesta emails. What if it wasn’t important to expose them in order to sway the election? How might Clinton’s use or Podesta’s use of email played out if she was elected? Neither of them have a great track record. Would the Russians or whoever been reading private confidential emails for the next eight years? googling it a bit, there’s also the claim this was not a sophisticated operation, and a Clinton IT operative may have slipped up. K, off topic and not very economic, but new info, and a link to interesting source. I give myself a B+ or B-.

  3. nobody says:

    National security has been compromised for corporate interests. It is outrageous.

    I once took an IP address under a corporate name. Immediately (I looked at the logs), I was attacked by Chinese hackers (I traced the IP addresses). Immediately.

    Then I received an email that was fishy. It was addressed to multiple people within the control of our power grid. It came from a Chinese IP address.

    Attacks are relentless. How did Russia get the info on Podesta? It could have happened any number of ways, but all it takes with Microsoft products is a bad email. There isn’t sufficient security for email attachments. And because it is cheaper to encrypt hard drives, the answer is to encrypt hard drives. It ruins productivity in the name of corporate welfare for Microsoft.

    Your country is having major problems. They can be fixed, but they won’t be fixed unless a majority of Americans can stand up against the corporate destruction of this great country.

  4. nobody says:

    Would you like to be #1? You can be that. I’m going to feed everything I know to you from now on. Krugman doesn’t deserve it.

    Who am I? I’m an engineer. An Electrical Engineer. I’m a person that realized the US economic policy was destroying our country. I’m a patriot.

    I gave you a piece of it the other day. That post on the TDA cost me approximately 15 minutes. It is very easy to solve our economic problems for politics. And this is the only viable reason for doing so. Politics. Honesty in politics.

    Be honest. Be real. Be good to each other.

    Bill and Ted’s excellent adventure makes it so.