Everyone Celebrate Stimulus Thursday!


I know, I know…in Obama's America, every day is stimulus day! But let us contemplate these two bits of stimulusiana on a fine Thursday afternoon:

*Bryan Caplan seems to endorse this temporary stimulus idea: states stop collecting sales taxes with a federal guarantee to make good the income difference for them out of its coffers. Isn't this in effect like a federal tax cut? Not exactly, he thinks:

…in a world with inflexible prices and wages, intertemporal substitution ramps up the effect of a sales tax cut, but not an income tax cut. What's the difference? When sales taxes are temporarily low, people have an incentive to buy more now. With inflexible prices, this intertemporal substitution diminishes the surplus in the goods market. Income tax cuts, in contrast, encourage people to work more now - exacerbating the surplus in the labor market.

As a proposal in an imperfect world in which I'd rather government not take any concerted action to manipulate our behavior but they are dead set on it, this strikes me on first couple of thoughts as not a terrible idea. (Yes, in the long term, where are the Feds getting this money they are rebating to the states? But where are they getting any of the money for any of the crazy crap they'll be doing in the next four years?)

*Also Caplan's partner at the EconLog blog, economist David Henderson, is in Forbes explaining how the professional work of Obama's candidate for chair of the Council of Economic Advisers, Christina Romer, seems to indicate that attempts to obviate grim economic cycles (such as the one we are now in) with federal fiscal stimulus measures of the sort Obama wants to initiate, whether on the tax or spending end, have a spotty history:

Tax changes intended to offset the business cycle, though, aren't so effective. The Romers [Christina and husband David] write, "[C]ountercyclical fiscal policy is not achieving its intended purpose." Why? "[I]t is difficult for fiscal policy to respond quickly to economic developments." The two largest countercyclical tax changes between 1947 and 2005 were Lyndon Johnson's 10% surcharge on income taxes, implemented to "cool off" the economy, and Gerald Ford's 1975 tax rebate, implemented to boost the economy.

The Romers point out that the surcharge was first proposed in January 1967 but wasn't passed until June 1968. And, although the 1975 tax rebate was passed within three months of being proposed, they note that it was not proposed until 14 months into the 1973-75 recession. They could have noted that the recession ended in March 1975, the same month the rebate was proposed and three months before it was passed.

Changes in government spending to offset the business cycle are also fiscal policy, and they have the same problem. We are well into the recession, we don't know how long it will last and we won't get an actual "stimulus" bill signed before February at the earliest. Even the pessimistic Federal Reserve is predicting a recovery beginning in the second half of 2009.

I wrote about some Romer research about the effect of tax cuts in the February 2008 issue of Reason magazine.