The Best Fiscal Stimulus: A Large, Temporary, Negative Income Tax
A great deal of thought is being given to the topic of how best to stimulate the economy. Overall spending seems to be falling off a cliff, with consumer, business, and state and local government spending all declining sharply. In order to prevent the natural acceleration of this process caused by lower spending from the newly unemployed, economists and policymakers have largely reached a consensus that the federal government must step in and boost its own spending to rescue the economy. This fiscal stimulus is now seen to be just as necessary as the banking rescue plan adopted recently.
The question then becomes: what is the best way to do this? Obama and his economic team are proposing a combination of tax cuts, public works, increases in the social safety net (unemployment insurance, food stamps, heating assistance, etc.), and aid to states and localities. Figures discussed are in the range of $500-$700 billion.
The difficulty here is that consumer spending constitutes about two-thirds of overall spending in the economy, and too large a fraction of the proposed stimulus program is channeled to the other components of spending, such as construction and direct spending by government, and not enough to consumers. The consumer component, tax cuts and safety net increases, is difficult to estimate from readily available information, but seems to be in the range of only $100-$200 billion, and a large fraction will be in the form of tax cuts to those who are well enough off that they will not need to spend them.
What should policymakers do? In the 1960s and 1970s a widely discussed policy option was the negative income tax (NIT), a progressive idea that was championed by conservative economist Milton Friedman. In the NIT, the idea of a progressive income tax is extended so that poor people pay negative tax, which means they receive money from the government instead of paying it. Currently, the federal government does have a negative income tax, called the Earned Income Tax Credit (EITC), but it is relatively modest, with outlays in the range of $35-$40 billion annually, and does not cover non-earners, who tend to be the poorest.
I would propose a much, much, larger NIT, which would return at least $1000 to every household. Those in the top four deciles (tenths) of the income distribution (the top 40%) would receive $1000, those in the fifth decile would receive $2000, the sixth decile would receive $3000, and so on, with the bottom decile, or poorest tenth of the population receiving $7000. With about 115 million households in the U.S., this would cost roughly $355 billion annually, which is still only half of the upper figure discussed for a necessary stimulus package. Over 80% of the NIT money would go to the bottom half of the income distribution in this scenario, with the roughly 20% for the upper half accomplishing the necessary purpose of creating widespread political support.
The moral arguments for a negative income tax have always been clear and simple. It relieves economic suffering on the part of those who suffer most, and it significantly reduces income inequality. The counterarguments, which are strong and, to me, usually persuasive, are that in weakens incentives to work (this has been tested and demonstrated empirically) and that it is unfair to those who are hardworking and productive to take their money and give it to others.
The important, point, which I don't believe has been made by anyone else, is that under conditions of severe economic recession, these counterarguments do not apply. Incentives to work may be weakened somewhat, but this will have no effect on labor markets and overall labor force participation because the demand for jobs will still exceed the supply of them so greatly that available jobs will continue to be filled quickly. In fact, pushing people to work more due to hardship would only cause the displacement of willing workers with unwilling ones, which makes the economy less productive, not more.
As for the argument that an NIT is an unfair burden on productive workers, this also does not apply because here the NIT is only using money that must be spent anyway in order to stimulate the economy. In fact, the best way to minimize the taxpayer burden of a stimulus program is to maximize the degree to which stimulus checks are actually spent by consumers. Therefore, a program that predominantly targets the poor, who will need to spend money immediately, actually keeps the long-term burden on taxpayers to a minimum.
People may argue that this program will be a political non-starter because no one wants to give money to the poor. I disagree. First, this proposal is sound economic policy. Second, it gives money to everyone without raising taxes, creating buy-in on the part of many taxpayers. Third, and most telling, it costs only half of what Congress has already given to banks. If it is politically possible to give $700 billion to negligent wealthy bankers, whom no one regards as deserving, then it must be politically possible to spend only half of that on everyone in the country.
The way to do this would be to label it as a temporary expansion of the EITC, for the purpose of maintaining consumer spending while the economy is in recession. The payments would last until the unemployment rate drops below 6%, when they would be cut in half. When the unemployment rate drops below 5%, the payments would end.
This program would be an enormous help to those who are suffering the most. People who have to choose between food and medicine, people who can't pay their bills, who are in danger of homelessness, all would be helped. Many working poor could replace possessions that are old and worn out. Some would junk very old cars and buy newer used cars. And all this alleviation of human suffering would also keep the economy afloat. Win-win.
Many people will doubt that enacting such a program is possible. We should consider the example of the Bush administration. While generally incompetent, they were masterful at using whatever circumstances were at hand to create political pressure for policies that were not inherently popular. They did this with 9/11 to start a war with Iraq, and with the financial crisis to divert enormous sums to investment banks. While I would never copy their morality or their policies, their political playbook should be studied. Their now exists an economic crisis that has the nation scared. If the Bush administration could use crises to frighten the country into bad policies, why can't the Democrats use one to frighten the country into good policies?
We have a progressive President and Democratic majorities in both houses of Congress. We also have a crisis for which this proposal is perfectly suited. If enacted, it would boost consumer spending significantly and immediately, unlike many other interventions, which take up to a year before they work. This could prevent the current economic crisis from getting much worse. Paul Krugman, Nobel Laureate, says 'Go big', on stimulating the economy. This is the way to do it.
Although I applaud the boldness of your proposal, my initial reaction is concern, dealing with the "give a man a fish and you feed him for a day, teach him how to fish, and he can feed himself" issue.
IMHO one of the reasons (among many)that so many people are hurting is that they don't know HOW to take care of themselves. They lack good decision-making skills, don't know how to plan for the future, etc. The idea of just tossing money at them doesn't seem to make much sense.
While recognizing that many people just want to throw a bunch of money at the current problem and hope it helps, I think it would be a foolish waste of money. Nothing will change except that a lot of poor people will have a bunch of "stuff" they didn't have before, but nothing will have changed in their life.
And, although taxes would not have increased, this is not "found money." It is debt put on the country's credit card, a debt that our children and grandchildren, perhaps even great-grandchildren will be paying. And the whole while, didn't change the fundamental problems.
I contend that our country cannot continue to grow through "consuming." It was fun while it lasted, but we need to find a way to fuel our economy in other less destructive ways.
We are a creative people and we need to put that creativity to work here. Isn't there some way we can match up needs with resources? Does it have to be one size fits all? Can we somehow get the money down to a community level? Would it be too Utopian to think that EVERYONE can contribute to the community in some way? What if the government bought paint so the community could spruce up the neighborhoods? What if the government bought yarn so the little old ladies could crochet hats for the children and blankets for the babies? What if the government bought groceries and a meal was distributed in poor neighborhoods every day?
What if we hired more social workers to go in and assess the needs of families on the brink of falling into poverty, then matched them up with the resources they needed? What if we sent teams of doctors and dentists into poor communities to do basic health care? What if we salvaged all the old bicycles going to the dump and refurbished them for communities to make available for people to get around on?
I do not believe there is a fast fix for this, as much as it is the American way. We have little tolerance for discomfort, and little patience for deferred gratification.
The country is in a real mess. We need to take this opportunity to reshape it, rather than just throw on a bunch of extremely expensive band aids.
December 16, 2008 1:28 PM | Reply | Permalink
Thanks for commenting, SI. I certainly agree with your concerns on a general level, and that is why I don't favor a NIT as a permanent policy. I feel strongly that a society needs a strong incentive structure to make sure that the behaviors needed by society are rewarded, so that a society can maintain itself and make progress. Communism failed because it refused to accept this.
However, the present situation is different. The main way that we reward productive behavior in our society is, correctly, through employment. But now there is not enough of it, so this fact also weakens the incentive structure of our society. If people who want to work cannot find employment, they cannot contribute to society and receive the rewards they deserve. And employment is ultimate dependent on spending. People cannot work unless others pay them to. And people are not paying. That is the fundamental problem, and the only way to increase consumer spending is to increase it. My main argument for a NIT is not as an anti-poverty program, but because it is really the only way to rescue our economy that will work quickly and avoid a very deep and prolonged recession.
Having said that, I should also say that in my work as a psychologist, I reserve a few hours a week for pro bono and very low-fee clients, most of whom are working poor, because non-working poor are covered by Medicaid or Medicare. These folks break my heart, some working full-time for $15,000 a year and not being able to get Christmas toys for their children. I also have some that are truly disabled and unable to work, living off paltry disability payments that only barely cover food, rent, and heat. I certainly don't have any sense of injustice at these folks having a bit better lives for a year or so.
The bottom line is that consumer spending has to be increased, and I can't see any other way that that can be done. Can you?
December 16, 2008 2:16 PM | Reply | Permalink
1. I'm hoping that it is untrue that consumer spending HAS to be increased, that there is no other way. We consume WAY too much...we need to find a way to fuel the economy that doesn't rely on consume, consume, consume, just for the sake of consuming.
2. I don't need anymore money from the government. If getting the people to accept a program to help the people who NEED help is dependent on them getting something, too, we have way more serious problems than just an economic collapse.
3. I don't want the government to spend one more dime on crap. If we need to spend magic money, it had better be on stuff we NEED, not fake jobs that the economy cannot support long term, or video games, or cigarettes. It had better be on stimulating behavior we want to encourage, not supporting behavior that is not in our long term best interest.
4. I doubt that there are staggering numbers of people that are so disabled they can contribute NOTHING to society. I don't quite know how to facilitate it, but there SHOULD be an attitude in this country that no matter what your circumstances are, you can and should contribute something, no matter how small. Personal dignity requires it.
December 16, 2008 4:08 PM | Reply | Permalink
Interesting idea. I think a NIT for the unemployed and poor would have a positive effect as you said by helping those in need and by injecting that money fairly rapidly back into the economy. I'd be concerned that a NIT going to the employed, relatively solvent, taxpayers would end up like the cash infused by Paulson, et al into the 'banks', and just sit in their accounts until, (if), their financial position deteriorates. In that case I would rather see 80% of the NIT skewed to the bottom 30-40% of households ensuring it gets injected back into the economy.
December 16, 2008 1:38 PM | Reply | Permalink
Thanks for commenting. The reason that I set up the numbers with 20% going to the top half was political. If everyone gets a check, I believe that this idea can be enacted. If half the country doesn't get anything, then I believe it can't be. Maybe I'm wrong, but common sense would suggest that. Of course you are quite right that, of the 20% going to the top half, much would not be spent and would be used for savings or paying down debt, and that fraction would not stimulate consumer spending. But I think that price would have to be paid to get a NIT enacted.
December 16, 2008 2:22 PM | Reply | Permalink
Everyone should not get a check. This is like the trickle down idea.... and it never trickles down.
December 16, 2008 2:27 PM | Reply | Permalink
Thera - My original thought was for an NIT that would cover the bottom half of the income distribution, with $5000 a year for the bottom 10%, $4000 for the next 10%, and so on, ending with $1000 a year for the sixth decile, those from the 41st through the 50th percentile of the income distribution. That would be about $175 billion, roughly half of what I eventually wrote up, with more stimulus per dollar because more of it would actually get spent. I decided to change it after talking to some people as a focus group and getting the reaction that giving all the money to the poor wouldn't be feasible politically, which I eventually agreed with.
December 16, 2008 3:21 PM | Reply | Permalink
Aren't you describing the "rebate" stimulus from last winter?
December 16, 2008 2:54 PM | Reply | Permalink
Thanks for the question. The answer is no. The rebate program was different in several respects. First, it was smaller. Second, it only gave money to earners, leaving out those on the bottom of the income distribution. Third, it wasn't progressive, it gave most people the same amount, and I believe some low earners got less. Thus, it was poorly designed as a stimulus because it gave a disproportionate fraction to high earners, who did not increase their spending. For these three reasons, it did not work.
December 16, 2008 3:25 PM | Reply | Permalink
You ARE describing the stimulus package, but you would modify it. Borrowing or printing money to create a stimulus only re-allocates wealth (current or future) at best. That is, it doesn't stimulate anything except inflation.
December 18, 2008 6:25 AM | Reply | Permalink
I couldn't disagree more with you. The last thing this country needs is unsustainable consumption again. The best recipe for restoring our economy is for the federal government to act as spender of last resort to invest massive stimulus on our long term economic potential. We should dramatically increase spending on energy efficiency measures akin to what California already has in place, retrofiting houses with top of the line insulation measures, encouragement through tax credits of purchase of Gold Star energy efficient appliances, a massive national investment in and retooling of our automotive industry, massive infrastructure investment and massive investment in scientific research and investment and aid to states. No more short term minded spending, if we deficit spend we should get something long term for the debt we incur. It is long past time to develop more seed corn, not just eat all of it at parties today only to face famine tomorrow.
December 16, 2008 3:07 PM | Reply | Permalink
I appreciate your comments, and I don't disagree with your priorities. Present discussions by economists suggest perhaps $700 billion will be needed in stimulus, and I set up my idea to take about half (actually about $320 bn over present EITC). I am assuming that the other half would be devoted, as clearly intended by Obama's proposals, for exactly the type of investments that you mentioned. These are clearly necessary, should be pursued, and I am sure that they will be. I am offering the NIT proposal as an adjunct to that, which I probably should have specified.
However, these programs will take time to get up and running, perhaps the better part of a year. "Shovel-ready" projects do exist, but not in big dollar amounts. In the meantime, the economy is contracting very rapidly. Today it was announced that prices are now falling at the fastest rate since 1932. This is scary. This is why Krugman says "Go big", and why it has to start right away. If we have to wait another 10 months, say, that would be another 5 million unemployed at present rates of job loss. Then we lose all the spending from those people, plus further spending loss from increased fear on the part of everyone else. I don't think people understand it yet. This is an economic emergency.
December 16, 2008 3:38 PM | Reply | Permalink
Take a look at the debt burden of the people you want to give this too, and explain to me how the money is going to go to consumer spending rather than staving off creditors for a few weeks or months longer.
December 16, 2008 5:25 PM | Reply | Permalink
So say you are very poor, bottom 10% of income. What's your debt load? Probably not that much, because your credit score is so low that no one will extend you any credit. But let's say you have $10,000 in debts, plus you can't afford to buy food, repair your car, buy backpacks and books for your kids, etc. What are you going to do with your money - pay off debt, or buy things that you need? Most would buy things, and put off their debt for another day.
One problem here: inevitably, these types of refunds to the very poor get intercepted to pay off court debt, child support, back taxes, and state assistance. A good chunk of this money would probably go straight back into State and Federal coffers, which does not do much for the economy.
What needs to happen, perversely, is to send a strong message with this money: don't save it, don't pay off debt, don't (good lord) buy property or invest in the stock market. SPEND IT. Preferably, spend it as locally as possible, so that it changes hands a few more times before it makes it into the coffers of a big Corporation.
December 16, 2008 7:29 PM | Reply | Permalink
Thank you, Allsburg (and also NCsteve)for getting into the nuts and bolts of my proposal. My experience with the poor (and I've worked with them a lot) tells me that allsburg is right, their debt burdens are not high because they can't get credit. They get behind on bills, which with my prosal they would catch up on quickly and then start spending. Interceptions to pay child support would still be spent because the money would be turned over to families with children. The other interceptions could be prohibited in the legislation.
December 16, 2008 8:26 PM | Reply | Permalink
I think your proposal is bad. By the way, Friedman's negative income tax was not just one time but was permanent. I think your proposal might be great for China. We need a more targeted approach for now. The problem is the housing stock, autos, and other credit sensitive expenditure that has been hammered. We need an expenditure which will stay in the US, at least for first incidence. And we need to encourage investment and not saving. I think you probably know the difference. Where to you see the proceeds from your proposal being spent the first time.
I prefer infrastructure and domestic investment.
December 16, 2008 5:40 PM | Reply | Permalink
Thanks, 99, for your comments and question. I am, of course, aware that Milton Friedman's original proposal was permanent, and I'm not in favor of that because, as many have pointed out, it creates disincentives to work and gives rewards to some who may not be deserving. I believe that the present need for immediate economic stimulus overrides these usually valid concerns, much as the recent bank rescue was necessary despite its patently unfair nature.
You raise the issue of where the spending needs to be to support the economy, which is very important. Housing is already hugely oversupplied relative to demand, so the Obama administration is very wisely intending to use government spending to occupy the construction industry in important productive work rebuilding our infrastructure. This is excellent, and maintains the consumer spending of those employed in construction, but it of course has natural limits. That's where my proposal comes in, because the NIT money would be spent predominantly on non-housing comsumer goods such as food, clothing, durable goods, and cars. People couldn't but new cars, but they could trade up for newer used cars and junk very old ones, which would at least provide some help. With regard to making sure the money is spent in the US, there is really no way to make consumers do that except protectionism, which is largely prohibited by our treaties with WTO and also is exactly what the US did during the Great Depression, which made everything worse because all the other countries then did the same thing to us. Remember Smoot-Hawley? Let's not do that again. Of course, in the long term, we need to increase both investment and saving, but I say let's worry about that a year from now.
December 16, 2008 8:45 PM | Reply | Permalink
We need a number of programs. And negative income tax for people making $15,000 a year, working not just full time but with overtime or a second job.
I don't know if I would take Tom's full gradation system. But I am with him on this.
It has to be PART of a stimulus program, no THE stimulus program and I cannot see that big a problem with including a tax break like Tom's in a total package.
This country is in such a mess, we have to go 'all in' like it was Texas Holdem. If we 5 billion here and 5 billion there with no synchronicity after a trillion goes to the capitalist pigs who got us in this mess, we are going nowhere.
Crimany, Nixon went with the negative income tax. We need something now, tomorrow and the next day.
There I feel better. Besides, I learned I could spell synchronicity.
December 16, 2008 6:26 PM | Reply | Permalink
Thank you, dickday, thank you! Finally, someone gets it that this is for ECONOMIC STIMULUS, and something like this is really the only way to 'Go big, go fast', which is what we'd better do ASAP or else we are at best Japan in the 1990s (really bad) and at worst America back in the 1930s (if the protectionist mentality on display here takes hold of the policy debate). I am not at all wedded to any particular version of this NIT, only to ones that target the money to people who will spend it, because that is the whole point.
December 16, 2008 8:52 PM | Reply | Permalink
I'm hoping this is a joke? The worst kind of stimulus, bound to send billions of dollars overseas to buy foreign goods, plus its inflationary, rewards people who don't work-- including those that refuse to work-- and basically reads like the Republican caricature of Obama's common sense proposals.
Can't wait to see this up on Powerline Blog or Drudge as an example of how the liberals want to "redistribute the wealth." In fact, I'm now convinced that you must be a Republican troll trying to make Democrats look like brazen socialists. That's just pathetic.
December 16, 2008 7:34 PM | Reply | Permalink
Sorry, no joke. To take your comments in order:
1. 'Sending billions overseas.' Your thinking on this is extremely dangerous. This was the knee-jerk nativist response to the Great Depression, which resulted in the infamous Smoot-Hawley tariff. This beggar-thy-neighbor policy caused all the other major trading nations to reciprocate with their own tariffs, which destroyed all our export industries and made everything far, far, worse. It is now regarded as one of the greatest economic policy blunders ever, and you would take us back there.
2. 'Inflationary'. Wrong. My proposal, if you would read it in detail, explicitly calls for its being phased out when unemployment drops. Inflationary pressures begin when an economy nears full employment, my proposal calls for phase-out well before that. Right now the economy is in DEflation, which is extremely dangerous, and in such cases getting the inflation rate back up to zero is a priority.
3. 'People who refuse to work' OMG. In a severe recession or depression most of the people who are not working are unemployed because there are not enough jobs. It's very difficult to get a government agency to look at all these people and decide which ones are morally deserving, and it takes too much time to set up a bureaucracy to do so. Yes, there are people who are lazy and refuse to work. But making sure that these people suffer to the degree that you feel is appropriate is not the country's priority right now.
4. 'Drudge and Powerline', 'Republican troll,', 'brazen socialist', 'pathetic'. I really don't care what Drudge and Powerline think, and neither should you, because they always think the same thing and everyone knows it. I don't believe that we have to try to look good for the right wing, and it's not possible anyway. As far as socialism: maybe so, but if the Republicans could sell socialism for investment banks because it would prevent a depression, then anything is possible politically. As far as an adjective like 'pathetic' is concerned, that is my take on you. Your entire response to a national crisis is to try to make sure that the people you don't like don't get anything. Your priorities are all about making sure that certain groups that you don't approve of don't benefit, like foreigners or 'people who don't work'. Your moral impulse in response to a problem is to ensure the suffering of those whom you resent, rather than to try to help the common good. 'Pathetic', indeed.
December 16, 2008 9:21 PM | Reply | Permalink
There's nothing sadder than watching someone resort to straw man arguments as he argues with no audience.
I'm sorry dude. I didn't realize how emotionally fragile you are. My apoligies.
December 16, 2008 9:32 PM | Reply | Permalink
hang in there. I am in the audience. Lefties of the world unite.
December 16, 2008 10:06 PM | Reply | Permalink
Thanks, DD. Much appreciated. Our day is coming.
December 16, 2008 10:22 PM | Reply | Permalink
Perhaps. But my day is already hear. Sensible Democrats rule the country!
December 17, 2008 12:04 AM | Reply | Permalink
.
I have a suspicion . . .
. . . that the game of solitaire may be this fella's favorite team sport.
~OGD~
December 17, 2008 3:19 AM | Reply | Permalink
Ok, sorry but somebody has to do this joke. "Hey, if you don't like Tom's idea, you must be a NITpicker."
On the more serious side of things, I kind of like the NIT idea because it focuses money way down the economic ladder, which is a big challenge. And I also like it because it's plainly not a Republican proposal, or a Democratic one designed to "pass" with Republicans.
And although I'm sure fname makes a valid point, I'm really looking forward to the day when we can leave "we can't even suggest this because Republicans won't like it" out of our discussions.
December 17, 2008 5:16 AM | Reply | Permalink
Thanks for commenting, Erica. This proposal sure has been an interesting Rorschach test for readers, with the aspect of giving money to poor people with no strings attached being what most people are focusing on. I thought that since this was a liberal blog most readers wouldn't have a problem with it, I'm surprised how many did. My own preference for helping the poor would usually be to give big rewards to them for any attempts they make to improve thier lives and the lives of those around them, but in an economic crisis I feel the priorities have to change. But giving money to the poor certainly doesn't feel to me like any kind of 'injustice', as it does to many.
December 17, 2008 8:07 AM | Reply | Permalink
I am not a nit picker either.
December 17, 2008 11:48 AM | Reply | Permalink
I was only referring to fname as a NITpicker. I think you were in favor of the NIT, and in fact made an intelligent comment about it. But wait, that would make you a NIT wit. That can't be right.
I swear I will never pun again. :^)
I am looking forward to considering the slew of comments this discussion has provoked. Like you and Tom, I wonder why the idea of seemingly giving something away to the poor has provoked so much emotion.
It seems that people like to be exceptionally tidy about the difference between investment and charity, and maybe that deserves some real examination given where we are right now.
December 17, 2008 12:46 PM | Reply | Permalink
.
Rating: Five Stars ... *****
. . . for the pun of the NITpicker and NIT wit, but particularly to Erica's sensible input to the serious topic at hand.
~OGD~
December 18, 2008 2:43 AM | Reply | Permalink
.
Rating: Five Stars ... *****
Tom... Thanks for broaching this particular angle on the coming crisis.
At no fault of their own, many have no clue as to what the coming months will bring. This is our third time we've seen the ship hit the rocks. We personally learned many tricks of the economic trade after the Nixon, Ford, Carter, Reagan slide into the abyss.
I'll be reading this thread as it develops.
Thanks again.
~OGD~
December 17, 2008 3:35 AM | Reply | Permalink
Thanks for taking the time to comment, OGD. You're right, I don't think most people realize yet how bad this recession could get if something isn't done to stave it off. Not only has the ship hit the rocks, but the hull has a hole in it and the ship is taking on water. I think by April or May the psychology will be much different as things get worse and unconventional approaches will be discussed more seriously. Maybe I'll recycle this then. Appreciate the support.
December 17, 2008 8:13 AM | Reply | Permalink
.
Just for general knowledge . . .
How Unequal Are We?
From: Working Group on Extreme Inequality Org.
To read the article:
To download a PDF of the Extreme Inequality Chart pack, CLICK HERE. (2.9MB)
It never hurts to have some current numbers and charts handy as a reference.
~OGD~
December 17, 2008 11:35 AM | Reply | Permalink
Tom - thanks for posting. As for fname and others who just resort to name-calling we just need to ignore them. I am one of a few Republicans on this site and I get those responses all the time.
I don't understand why people like fname just post retorts like that.
Anyways, this obviously could help on the spending side but how does it create new jobs?
Right now I am out of work and if I receive a check I am not going to spend it on anything but food and utility bills and mortgage payments until I get a new job.
Don't we also need to take actions that will create new jobs?
December 17, 2008 7:59 AM | Reply | Permalink
Thanks for the support, MCB. Yes, I think we need to do everything possible both to create new jobs and help people keep the ones they have. I think that the infrastructure spending proposed by Obama will do that (I offer my proposal as an addition, not as a replacement), but probably not for a few months, at best. I'm thinking of my proposal as a way of hopefully keeping unemployment around 7-8% until then, instead of the 10-12% that I think is quite possible without something like this. And if you spend a check on food, housing, utilities, that's still consumer spending. Way better for you and everyone in your situation to be spending money on those things than not being able to, and better for the economy also if you can do that. Good luck on the job search, I hope it goes well for you.
December 17, 2008 8:21 AM | Reply | Permalink
I think we also need to cut the corporate tax rate and also eliminate taxes on investing. Let's pay taxes on earnings but not get taxed again (and sometimes 3 times) when we invest the money or when we die.
December 17, 2008 8:42 AM | Reply | Permalink
.
In the case that MCB returns . . .
Something of historical interest . . .
Read the rest at: Inequality and the Common Good November 3, 2008
~OGD~
December 18, 2008 2:48 AM | Reply | Permalink
Tom-
You argue that this would be a temporary measure, rightly out of fear of the disincentive for work. However, if there's one thing history has shown us both in the US and the social democracies of Western Europe, it's that social welfare programs are extremely difficult to rollback, much less repeal. Those in the lowest of income brackets often have little to lose through violent protest, as was seen in the banlieus in France last year and currently in Greece. Those receiving this "temporary" free lunch would balk greatly at its dissolution. I agree that we need a stimulus, but I find the creation of temporary jobs until the market recovers and replaces them a much more politically feasible option and better in the long run.
Last year's stimulus checks showed us that those with wealth will simply hold on to them, and those without it will be forced to pay off creditors. I know you addressed this earlier in the comments section by arguing that the debt burden of the have-nots is much less than the haves. However, predatory loaning practices such as payday loans, rent-to-own, and others often require close to a 300% return once late-fees accrue, a common problem that occurs even after repossession of collateral.
Just my thoughts.
December 17, 2008 10:55 AM | Reply | Permalink
Thanks for commenting, Cogin. You points are well taken, and certainly some of the money would go in the direction you suggest. But some 'leakage' of additional spending power into savings or debt reduction is always going to occur. Most economists agree, however, that greater and greater fractions of additional income are spent, the further you go down the income distribution, and I'm working on the assumption that this is true. While a lot of the poor do use the horrible forms of credit that you describe, there are also many that do not, and the amount of credit available to those who use it is limited by their lack of assets.
Your point about the politics of abolishing the program is interesting. Of course, in my proposal the NIT would go away automatically when unemployment drops, so the question would be about whether there would be a political consensus to legislate extensions. My guess is not, but that's only a guess. Of course you're right about temporary jobs creation, but the same political dynamic would apply to that also. And the real reason for my proposal is that it may be the only thing that can sustain consumer spending quickly in the short run (jobs creation takes time). We are losing 500,000 jobs a month now, and the big question is whether that was an aberration or will continue. If it continues, then we losee 5 million in the next ten months before jobs programs, low interest rates, and quantitative easing take effect, and the huge loss in consumer spending that those lost jobs take away may be too much for for the other policies to offset.
December 17, 2008 1:05 PM | Reply | Permalink
.
Just in case . . .
. . . you bypassed the comments in the thread.
How Unequal Are We? @ December 17, 2008 11:35 AM
~OGD~
December 17, 2008 11:43 AM | Reply | Permalink
Thanks. I know about Piketty and Saez, their work seems excellent. I also think that this is an underlying problem that is a partial cause of 'Depression Economics', as Krugman puts it. It seems sensible to me that rising inequality would cause increasing debt among the less well-off as people with declining incomes try to maintain their levels of consumption. It makes sense that rising inequality would cause big increases in financial assets among the well-off, which would contribute to economic bubbles. So, it seems to me that inequality, while obviously a big issue on simple moral grounds, is probably even bigger than it seems. Thanks for the link.
December 17, 2008 12:51 PM | Reply | Permalink
OGD - I know that we had 90%+ rates back in the 1950s and 1960s - but what's your point?
December 18, 2008 7:44 AM | Reply | Permalink