Now They Tell Us…

Oh wait, our side was saying this the entire time.

A new NBER paper from Harvard’s Alberto F. Alesina and Silvia Ardagna (”Large Changes in Fiscal Policy: Taxes Versus Spending”) makes the case for tax cuts over spending as stimulus:

As we well know a very large portion of the current astronomical 12 percent of GDP deficit is the result of bailout of various types of the financial sector.  … But part of the deficit is the result of the stimulus package that was passed to lift the economy out of the recession. About two third of this fiscal package is constituted by increases in spending, including public investment, transfers and government consumption. According to our results fiscal stimuli based upon tax cut are much more likely to be growth enhancing than those on the spending side. In this respect the US stimulus plan seems too much based upon spending.

Needless to say when considering a single episode many other factors jump to mind, factors which are difficult to capture in a multi country regressions. For instance, American families were saving too little before the crisis. An income tax cut might have just simply been saved and might have had not a big impact on aggregate consumption. However, more saving might have reinforced the financial sector, think of the credit card crisis for instance. In addition, one could have though of tax cuts that stimulate investment. Also, given the gravity of the crisis an increase in the generosity of unemployed benefits seems quite warranted both in terms of social justice and in terms of sustaining aggregate demand, since the unemployed probably save very little anyway. The benefit of infrastructure projects which have “long and variable lags” is much more questionable.

NBER  is short for the "National Bureau of Economic Research."  They're commonly seen as the guys charged with labeling a Recession a Recession and so on.  So often, when it comes to economics, they're often the smartest guys in the room in a statistical/analytical sense.

Here's what the Economics Thinkers at the Heritage Foundation were saying the right kind of economic stimulus should have been in February:

Capable of producing a short-term stimulus, capital gains tax cuts are also a responsible pro-growth policy. Such cuts trigger an immediate stimulus because distortions on investors' behavior are eliminated. Yet there are also long-term benefits to cutting capital gains taxes cuts: a real reduction in the cost of investment.

Borrowing and spending may provide some immediate relief, but such policies reduce growth in the longer run and tend to expand government permanently. A policy of reducing tax rates allows the private sector to produce the stimulus instead, thereby avoiding such flaws.

When the financial sector and private investment are weak, as is currently the case, the best taxes to reduce are investment-related taxes. The elimination of capital gains and dividend taxes would encourage increased investment that puts more funds into the financial service sector so that the economic pipes can begin flowing again.

Perhaps its well past time the Obama Administration and Democrats in Congress stopped demonizing tax cuts.  Then again perhaps it will rain frogs in Washington, DC too.

Stranger things have happened.