Mark Zandi on Unemployment

Mark Zandi, chief economist of Moody's Analytics and co-founder of Economy.com, sits down for a conversation with attendees of the Monitor Breakfast about the state of the economy, including the recent plunge in U.S. housing sales and rise in unemployment. While he is optimistic about the economy's long-term chances to rebound, the national unemployment rate will likely continue to rise through the November 2010 elections. "If it's 10 percent come Election Day, I'm not sure I'd be surprised," says Zandi. "It's going to be in that kind of ballpark."

Government spending is better economic stimulus than tax cuts

Paul Rosenberg has an outstanding post up at Open Left on a report by Mark Zandi, the chief economist and co-founder of Moody's Economy.com. Zandi analyzed different types of tax cuts and government spending in terms of "fiscal stimulus bang for the buck."

Click here to view the chart showing his conclusions. Various types of government spending all delivered much more stimulus to the economy than even the most effective tax cuts.

Temporary increases in food stamps carried the most "bang for the buck," $1.73 for every federal dollar spent. That's because food stamp money goes into the hands of people who will spend it right away. Not far behind was extending unemployment benefits (which also helps people likely to spend money quickly) and government spending on infrastructure (which creates jobs).

Zandi found that even the government spending that delivered the least bang for the buck, general aid to state governments, still generated $1.38 for every federal dollar spent.

On the other hand, most tax cuts generated far below $1 for the economy for every dollar they cost the federal government. That's particularly true for the tax cuts Republicans tend to favor, which mainly benefit high-income Americans or businesses. These generate between 25 and 50 cents for the economy for every dollar they cost the federal government.

By far the best tax cut for stimulating the  economy, according to Zandi, was a payroll tax holiday, which generates $1.28 for every dollar it costs. However, a payroll tax holiday still ranked significantly below various types of spending in terms of "bang for the buck."

Rosenberg created a second chart combining Zandi's figures with job creation numbers from the Center for Economic Policy and Research. It shows that millions more jobs would be created by $850 billion in spending compared to $850 billion in tax cuts.

Not only does government spending create more jobs and stimulate more consumer spending, it can also accomplish tasks that benefit the community as a whole. For instance, everyone who uses a bridge benefits from maintenance that prevents that bridge from collapsing. Thousands of travelers could take advantage of improved passenger rail service, which would also reduce greenhouse-gas emissions compared to driving or flying. For those reasons, I agree with the state legislators from the midwest who have advocated more rail funding in the stimulus bill.

Iowa Senator Chuck Grassley derides the stimulus spending as "porkulus," but yesterday the Iowa Environmental Council made the case for another infrastructure program that would have huge collateral benefits: upgrading substandard sewage and drinking water systems.

President Barack Obama and Democratic leaders in Congress need to do a better job explaining that the spending in the stimulus bill would directly boost the economy much more than tax cuts.

On a related note, I recommend reading Theda Skocpol's comment published today at Talking Points Memo.

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