One excellent post by Prof. Chinn has direct relevance to governmental policy initiatives to deal with the economic problems. Her post is based on work by Mark Zandi of Economy.com. The question is: given that the economy needs to be stimulated, what method of stimulation yields the largest economic benefit. The benefit here is expressed as the stimulus multiplier, which is the amount of increase in GDP per unit of stimulus. For example, if we simply gave every person in the country $1, each could go out and buy a McDonald's value menu item. But the benefit doesn't stop there because with the increased consumption, McDonald's has to hire more workers, who in turn consume more; purchase more supplies from its suppliers, who in turn hire more workers, etc. So in principle, a $1 stimulus package can have more than $1 benefit to overall production.
So which economic stimuli had the greatest benefit? The top three were:
- Temporarily Increase Food-stamps (multiplier 1.73)
- Extend Unemployment Insurance Benefits (multiplier 1.64)
- Increase Infrastructure Spending (multiplier 1.59)
Now for the worst stimulus concepts:
- Make Bush Tax Cuts Permanent (multiplier 0.29)
- Cut Corporate Tax Rate (multiplier 0.30)
- Make Dividend Tax Cuts Permanent (multiplier 0.37)
Note that these tax cuts that are discussed most readily as the solution to the economic problems have some of the worst possible effects on the economy. In fact, a tax cut actually hinders production, compared to other stimuli. Dr. Chinn discusses some reasons this may be true.
What fascinates me is the question of whether the multipliers work in reverse. If reducing corporate taxes by $1.00 hobbles the economy by $0.70, then would raising taxes by $1.00 improve the economy by $0.30? As heretical as that sounds, it seems that while raising taxes will withdraw $1.00 from corporate coffers and hence from the economy, it enables the government to spend $1.00 on more needful and worthy areas (say, on stimuli that have a large multiplier!).
The situation is somewhat more complicated because each of the stimulus concepts have different time scales, so it would require a more delicate touch than brute force. But it would be nice if, in the political dialog about what to do next, actual economic data would be used rather than mindless rhetoric with zero substantiation.