Wednesday, January 20, 2010

Similar numbers to Smart Growth's earlier report were released by the CBO, and Paul Krugman has a chart:

If you're unfamiliar with Keynesian economics altogether, you're probably the one complaining about the fact that the government is being silly enough to go into debt in a recession. But, if you agree with the premise that deficit spending is one of the major ways to stimulate an economy in hard times, you'll find the numbers kind of interesting.

The common liberal drumbeat is that government spending will have a greater effect (i.e., a larger fiscal multiplier) on the economy. The common conservative retort is that a tax cut will have a greater effect on boosting the economy. Taken as broad categories, most data supports the idea the government spending wins: when the government spends it, you know the money's spent; when it's returned, it might just sit in account. But as the chart above shows, if you break it down, there are some tax cuts that will do really well in boosting the economy, like the payroll taxes. Notice that capital gains, energy, and land are not on the list.

Of course, unemployment benefits tend to do very well, because it's a return to people who are nearly guaranteed to spend it, as they are in the greatest need. This is also why, contrary to trickle down theory, if you want to stimulate the economy with a tax break, give it to the poor, because they need to spend immediately on important needs. Give it to the rich, and they either sit on it, or perhaps send our economy in frivolous directions and make our work vapid.

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