New Perspectives on the Fiscal Stimulus

Everyone is getting in on the fiscal stimulus game. A brief survey...

The Congressional Budget Office (CBO) has weighed in with a well balanced and researched primer. Many of its conclusions are similar to the Brookings primer reviewed below so I will refrain from commenting further.

The Economic Policy Institute (EPI) provides an interesting reason to favor increased government spending over tax cuts in its plan. (Emphasis added)

Government spending is more effective than tax cuts in stimulating domestic demand for two reasons: a portion of the tax cut will be saved rather than spent immediately, and consumers are more likely than the government to spend on imports (rather than domestically produced goods). Approximately 10 cents per dollar of consumer expenditures will be spent abroad, while virtually every penny of investments in public infrastructure will be spent domestically.

The EPI also believes that this spending should satisfy unmet social needs. I think everyone agrees that this is a good principle but whether government or individuals best make this decision is a pretty fundamental ideological divide.

The Center on Budget and Policy Priorities (CBPP) subscribes to the timely, targeted and temporary goals for a stimulus pushed by Brookings. They do, however, cite work by Stiglitz and Orszag pointing to government spending being more effective than tax cuts, probably because the spending is direct as opposed to transfers to taxpayers who may end up saving.

Still, the CBPP points to broad-based tax cuts as an effective measure because they are easy and quick to implement. They also support state fiscal relief, strengthened unemployment insurance, and temporary increases in food stamp payments as effective measures.

In contrast to EPI, CBPP opposes new infrastructure investment as projects usually take months to get off the ground.

The Center for Economic and Policy Research (CEPR) is pushing a $600 tax cut for all taxpayers, $20 billion in tax credits for energy-conserving homes and businesses, $7 billion in public transit use subsidies, $3 billion in heating subsidies for low and moderate income families, and $25 billion in temporary relief for states and localities.

So that's quite a mix of options for you. Notably, with the exception of the EPI/CBPP differences on infrastructure spending, there appears to be pretty widespread agreement on what makes up an effective stimulus package.