Tuesday, January 13, 2009

A short note on a payroll tax "holiday" 

Should we immediately pump money into the economy via a payroll tax holiday? Well, among the various objections is this: Consumers are so hunkered down that workers will save most of the money or use it to pay down debt, rather than spend it or invest it an actual project. To the extent this happens, "saved" payroll taxes will not multiply through the economy sufficiently to boost GDP much, and will amount to little more than a nationalization of existing consumer debt. Why will it help (more than a little) to move yet more liabilities on to the federal government's books? Much as I wish we were not in this situation at all, I prefer direct government spending on projects because it will multiply much more effectively through the economy even if it takes longer to get going. The trick is to spend the money on projects that will boost our productivity over the long run.


By Blogger RPD, at Tue Jan 13, 10:40:00 AM:

Maybe I'm misunderstanding this a bit. The govt. taking less of our money for a while is nationalizing consumer debt? Seems to me that paying down debt is a good thing, and that at some point debts would be paid down sufficiently that people would start spending again.

Am I being an ideologue here?  

By Anonymous Anonymous, at Tue Jan 13, 11:35:00 AM:

A payroll tax holiday is good only for those who actually PAY payroll taxes. The retired, the unemployed would see no benefit.
But, whatever plan gains favor, always consider the unintended consequences. Any massive government spending program will encourage millions of Mexicans to come to/return to the US to take advantage of the available employment opportunities.
Some of the wisest moves will not be made because of left wing whackos. For example, we should use government money to drill here for gas and oil and build new domestic refineries. This would reduce our costs and vulnerabilities. Will Chimpy the Kenyan do it? No, but he'll spend billions on raising chipmonks to spin the cage to generate electricity.  

By Blogger TigerHawk, at Tue Jan 13, 06:18:00 PM:

RPD - If we cut payroll taxes there will be more borrowing by the federal government at the margin (because the books have to balance). If people use the proceeds of the tax cut to pay down their own debt, we have essentially substituted U.S. federal debt for the consumer debt.  

By Anonymous Anonymous, at Wed Jan 14, 09:46:00 AM:

Targeted tax cuts would be more effective than silly government spending, but "economic stimulus" is the flavor of the month.

We can't sustain trillion dollar plus deficits to fund Obama & Co's plans ... maybe not even for one year. That's because we'll run out of foreign lenders, so the borrowing to fund government spending will crowd out domestic borrowing. We're in a different place than Bush-Cheney were a few years ago ... they had the Chinese and other foreigners to cover our deficits. So Obama's stimulus plan won't just leave a bill for the next generation ... it will take money away from the private sector today ... to piss it away on politically connected projects. Very little of Obama's spending will go to anything that will increase long-term productivity.

This will sharply depress our long-term GDP growth rate, which right now is negative ... that's what a recession is. Historically, our economy grows by about 3% per year, which is faster than our population growth ... which means that about every 30 years or so, our per capita income doubles ... every generation is better off than the one before. You can't underestimate how important a dynamic this is ... we've enjoyed this for so long that we take it for granted.

We've created a horrible environment for venture capital investment, a key driver of long-term growth. Current trends will only make it worse.

Which presents a significant second order problem: if we have years of no growth many long-term budgets will blow up. For example, our state governments and many pension plans are dependent on growth ... without it they'll all be running even bigger deficits. At the federal level issues over our unfunded social spending commitments will accelerate ... the numbers were bad when we assumed our whole economy would double in twenty years ... without growth they'll blow up even faster.

The train wreck is coming ...


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