Plain Sense Economics

These interesting times carry blessings and curses for economists. Suddenly fellow Rotary Club members, faculty colleagues, and neighbors want to know my opinions. On the other hand, my opinions are based on pretty sketchy knowledge.

I’ve purposefully not dug into the specifics of the various House and Senate bills that are now headed for a collision in the conference committee this week. They were changing quickly and sometimes quietly, and absent gluing myself to an online source for large parts of the day I couldn’t keep up.

So, with those substantial disclaimers, here are my thoughts on what I know so far:

• We need spending that stimulates demand in the economy. By theory the most efficient way to do that is to increase government spending. Tax cuts, in theory, are helpful, but less so.
• Paul Krugman and others worry that all of the spending figures sloshing back and forth between the two houses of the legislature are insufficient to fill the gap between current GDP and our potential GDP. I don’t know enough to contest their figures, so I worry, too.
• I’m not sure the tax cuts that remain in the stimulus package will be very helpful, but I need to learn more about them. I find Milton Friedman’s permanent change in income hypothesis (only permanent changes in income spark changes in spending) persuasive. Mankiw’s proposal for a cut in the payroll tax sounds like the best kind of tax cut, if we must have one. It helps working people, which is good in itself, and working people are more likely to spend new disposable income, which is also good.
• States and local governments are hugely squeezed in hard times, since their tax revenues drop, and yet they don’t have the ability to engage in deficit spending. Any kind of money to help them maintain their social safety net and build/repair infrastructure is money well spent. As of early this week, this piece seemed to be either gone entirely or substantially reduced. We’ll see what the conference committee does with it.
• I’m in favor of many of the policy initiatives added by the Democrats as part of this package, but their inclusion muddies the waters, and gave Republicans more to complain about. The total dollars involved are supposed to be small, and some of the initiatives might stimulate spending, but I would have preferred a crisp, clear stimulus package, with laser like focus on closing the GDP gap.

We’ll all stay tuned…