Economy & Policy

How to get bang from the stimulus buck

By Justin Fox | November 11, 2008 | +

What kind of fiscal stimulus would have the most impact on the economy? Moody’s Economy.com has made estimates for various different stimulus proposals of the one-year change in GDP for each dollar in government spending or tax cuts. Here are some examples:

Non-refundable lump-sum tax rebate: $1.01

Refundable lump-sum tax rebate: $1.22

Payroll tax holiday: $1.28

Across-the-board tax cut: $1.03

Make Bush income tax cuts permanent: $0.31

Cut corporate tax rate: $0.30

Extend unemployment benefits: $1.63

Temporary increase in food stamps: $1.73

General aid to state governments: $1.38

Increased infrastructure spending: $1.59

These are all estimates churned out by a model, not hard facts. Economy.com chief economist Mark Zandi says the model assumes that getting money to people with lower incomes has a bigger impact “because their saving rates are lower and they’ll spend more quickly.” It also rates government spending as more effective than tax cuts because (a) a portion of tax cuts is saved, not spent and (b) consumer spending tilts more toward imports than government spending does. The long-term growth benefits both of certain tax cuts and of infrastructure spending aren’t factored in to the model–since it’s only estimating the one-year change in GDP.

Related Topics: Economy & Policy

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  • pneogy

    Paul Krugman’s NYT blog today suggests that the fiscal stimulus to be effective needs to be about $600 Billion. Between Krugman and Moody’s we now have a handle on how much to spend, and what to spend it on!

  • That Anonymous Dude

    how do I apply for food stamps?

    “Make Bush income tax cuts permanent: $0.31″

    looks like someone cut and paste his (slightly old) approval numbers in there.

  • curmudgeon57

    The problem is that this is the result of a model that includes the modeler’s biases. At least Zandi is honest about those biases. I’m just not sure that those biases reflect reality.

  • plukasiak

    What is needed is a stimulus plan than ensures that the money spent on “stimulating” the economy actually does so. Tax breaks — especially those aimed at corporations, capital gains, and the wealthy — actually damage the economy because they simply raise the price of stocks, lowering P/E ratios, and increasing stockholder demands for layoffs in order to maintain/improve the profit picture of their investment. Giving money to those “most in need” is better than giving it to the rich, but (as noted above) a very large chunk of the money gets spent on the imported goods that less-well-off americans can afford.

    If you want to stimulate the us economy, give middle class and poorer americans a $1000 debit card that expires in a relatively short period of time, and which can only be used to purchase American made goods.

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  • bryanfromhouston

    This is all fine and dandy, but what this country needs is a sustainable growth engine. So far, no policy has come forward with how to accomplish that task. Until we are able to provide jobs for those who want to work so that they can buy or rent homes and lease or purchase cars, there is no current plan I see that is going to work. We, I am afraid, are headed for a global depression-lite. I wish that it weren’t so, but I just can’t say it.

  • tegwar

    As hinted about by curmudgeon (should I capitalize that?), it’s not just the modeler’s bias but also a question of whether the past data fed into the model is reflective of the behavioral responses we’d see over the next year. To wit, all those tax ideas rely on the consumer spending propensities of various households. If the consumer is retrenching across the board, would more cash in the pocket be as used as in the past? Wildcard. (Also, the number of different tax variations run through reflects a certain paucity in our ability to think this last decade or 3). Although, maybe we want to give consumers cash which they plunk into lowering their debts…
    Or, even more of an argument for the infrastructure / have the gov’t spend the money directly approach. Especially if it moves us toward that ballyhooed green revolution which can propel us forward for the next few decades.

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