The 2011 Stimulus Proposal

A few thoughts about the $450 billion stimulus proposal that Obama presented last night…

This is a big proposal, composed of a lot of very effective ingredients. If enacted (which it won’t be, but that’s another issue), this would make a noticeable difference to the recovery — I would expect the number of jobs it would create to be in the millions, not thousands.

The good:

1. Unemployment benefits: The biggest bang for the buck would be the extension of unemployment benefits. Numerous studies show that this provides a large and direct boost to the economy.

2. Infrastructure: The proposal includes a large amount of spending on infrastructure (schools, parks, roads, bridges, mass transit), which also provides a very large bang for the buck. Furthermore, greater infrastructure spending has the tremendous advantage of yielding benefits far into the future by generally increasing the productivity of the US economy. The US’s infrastructure is dreadfully underfunded and out-of-date; since we know we need to spend huge amounts of money over the next 10-20 years to fix it, why not do it now when we have lots of unemployed labor (especially construction workers) and rock-bottom interest rates?

3. Payroll tax cuts: I also like the proposal’s tax cuts that go directly into the pockets of middle-income consumers, namely the extended reduction in payroll taxes for workers. Such tax cuts are almost completely spent (middle-class consumers save very little of their take-home pay), and would therefore have a very direct impact on the economy.

4. State and local government jobs: The proposal would include funding to be passed along to state and local governments so that they could avoid laying off teachers. Again, good in the short run for the US economy, and very good in the long run.

5. Mortgage refinancing: this has been covered in some detail by others, and it would have the potential to provide some real stimulus to the economy.

The not-so good:

There are a few tax cuts, credits, and so forth that I think would be of dubious value…

1. Cut payroll tax for employers: This provides little incentive to firms to hire more workers. The primary effect, I suspect, would be to increase corporate profits. Some studies assert that such employer payroll tax cuts can induce firms to reduce prices (thereby raising sales and production); but if the tax cuts are targeted only at small and medium-sized businesses, as in the Obama proposal, then that mechanism probably won’t work because small and medium-sized businesses are generally price-takers, with little scope to change their prices by a significant amount.

2. Tax credits for hiring unemployed veterans: The main impact of this provision, I think, would be to inspire firms to look specifically for veterans when hiring: any firm that is going to hire someone anyway will now simply look for a veteran. But it’s doubtful that many firms would create entirely new job openings just because of this provision. In other words, I would expect the main effect of this to be that firms would change the type of job candidates they are looking for, not the number of them. Good for veterans, but bad for non-veterans, with little net impact on the economy.

3. Extend 100% expensing for businesses: I’m not sure how this is supposed to help. In theory, allowing 100% expensing (i.e. deducting the full amount in year 1 of an investment that has a multiple-year useful life span) should persuade firms to move planned investments from the future into the present. But since this provision is already in place, firms have already been pushing forward whatever investments they could. I suppose that it could provide some benefit in the second half of 2012… but little to no benefit for the next 12 months.

Nevertheless, as I said, taken as a whole this was a big and ambitious proposal. And it would really help. The fact that it has no chance of passing tells us something about the US’s political system right now… but I do think that Obama should get full marks for at least trying.

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About Kash Mansori 46 Articles

Who is this guy, anyway? And is Kash his real name?

Yes, Kash Mansori is my real name, and I've been writing online about economics since 2003, with a few breaks here and there. After receiving my PhD in economics in the late 1990s, I did a tour of duty as an economics professor at a small liberal arts college in northern New England. The charm of 6-month long winters eventually wore off, however, and I left the academic world in order to move south to warmer climes. I now live in North Carolina and make my living providing economic consulting services, primarily to US and European companies in the manufacturing, high-tech, and finance industries. I have a couple of kids, I enjoy cooking, and I have maps hanging all over the walls of my house.

Visit: MINA Economics

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