“The Case Against the Fiscal Stimulus” by Harvard economist Jeffrey Miron is a great article, not so much because I agree with everything he says but because he sparks some healthy debate about the federal stimulus. Given the results of the election, advocates of more fiscal stimulus will likely have to take a back seat to advocates of reducing debt. So it’s especially worthwhile now to examine a thoughtful critique of the stimulus.
What Miron and I agree on is that “the stimulus adopted was a missed opportunity of colossal proportions.” But while we ultimately come to the same conclusion, we have very different reasons for agreeing. I don’t think there was enough stimulus, use of leverage (like using local bonding capacity), and we likely need more stimulus still. But, I do think Miron hits on some key questions about the stimulus, and where it might have gone wrong.
Here’s a look at two of his core arguments.
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Miron: Tax cuts are better than spending. Monetary policy—decreasing interest rates, for example—was pretty well tapped out in 2009, with interest rates basically at zero. The only option left was fiscal policy, increasing demand in the economy by decreasing taxes or increasing spending. Miron points out the standard objection with spending-oriented fiscal policy—it’s often too slow. (Thinking back to my posts last summer about energy efficiency retrofits being held up by confusion about the prevailing wage, I think there’s some merit to the point.) Spending a lot of money simply takes a lot of time, especially if it’s the government doing the spending, and the public demands a high level of accountability.
In Miron’s view, tax cuts are better.
Even if one takes the basic Keynesian framework as given and accepts that government should stimulate during recessions, existing evidence suggests that an effective package should consist of lower taxes, especially decreased tax rates. This approach is likely to be beneficial whether or not the Keynesian analysis is correct because reductions in tax rates improve the incentive to work, save, and invest. This increased efficiency means higher productivity and income, so the net impact on the deficit can be smaller from a well designed tax cut than from increased spending.
I agree with his point that “decreased tax rates” are an important part of good fiscal policy, though they should be tailored carefully. A good example is the Business Energy Tax Credit (BETC) and the Residential Energy Tax Credit (RETC) in Oregon. (I wrote about the importance of BETC during the last session of Oregon’s legislature.) A big part of Oregon’s leadership in energy innovation is because of BETC, essentially a tax break for clean and efficient energy. Miron and I also agree that it would be a good idea to reduce what Miron calls “employment taxes” and what Nouriel Roubini call payroll taxes. The point is that the best tax cuts for stimulus are ones that reach the average worker on payday.
Miron: Make energy taxes higher. Here’s a place where Miron and I also agree.
Rather than trying to promote energy efficiency with slow acting and ineffective energy programs, the right approach is higher energy taxes, which directly raise the price of energy and discourage its use. Much of the infrastructure necessary to collect these taxes already exists. The degree to which energy taxes raise prices is observable. Thus, gauging the magnitude of the intervention is straightforward.
Miron goes on to say that as taxes are increased on energy, other taxes should be lowered “to offset the higher energy taxes and provide the desired amount of stimulus”—a classic tax shift. (Miron is a supporter of cap and trade, or at least a carbon tax.)
So my debate with Miron sort of comes out a draw. We agree on quite a bit (there are other points I didn’t cover in this post about corporate and payroll tax deductions, and investments in highways that are also worth checking out in the article), including that the stimulus could have been better. There could have been more tax cuts—but we disagree on what those tax cuts should have been for. I’d argue that cuts for sustainable things—like renewable energy and retrofits—make the most sense.
Notwithstanding the results of the recent election, the United States needs to take another whack at the stimulus piÃ±ata. Those of us who think so—including Paul Krugman—are in a political minority. Even opponents like Miron, though, seem to agree that targeted tax cuts and spending can produce the economic activity we need.
I hope the new regime will listen, at least, to Miron’s point about energy taxes. And if we’re handing out tax cuts, they ought to provide tax benefits for energy efficiency retrofits and the tax credits for things like the district energy proposed by Minnesota’s Representative Betty McCollum. That bill is written and ready for consideration. Maybe there is still some hope for making some good job-stimulating energy ideas a reality.