Bush Administration Considering Going Keynesian (Part II)

January 4, 2008

It appears that the General Theory is on the president’s reading list once again. Given that the economy appears to be headed for a slowdown this year, the Bush Administration is considering short-term tax relief as part of an “economic stimulus” package, according to an AP story today by Martin Crutsinger:

The Bush administration, faced with a deteriorating economy and a big jump in unemployment, said Friday it was considering an economic stimulus package that might include tax cuts to ward off a recession.

On Friday, the Labor Department reported that unemployment was at a two-year high of 5 percent in December, while employers clamped down on hiring for the month. The amount of new jobs employers added to their payrolls was at a four-year low.

Officials stressed that President Bush has not decided yet to offer a proposal but was looking at a variety of options with a plan possibly being unveiled around the time of his Jan. 28 State of the Union address.

“The president is always looking at options … always talking to people and looking at data,” Commerce Secretary Carlos Gutierrez said in an interview with The Associated Press.

White House spokesman Tony Fratto said tax cuts were an option being considered.

Bush in his first term included a tax refund of up to $300 per person to combat the impact of the 2001 recession. Private economists said another round of tax cuts would be the best approach to get money to people who would spend it.

Some suggested a one-year tax rebate of $500 might provide a sufficient shot-in-the-arm for the economy. But they stressed that the proposal would have to be passed quickly.

The extent to which short-run fiscal stimulus packages work in stabilization has been the subject of decades of research in macroeconomics leading researchers to draw differing conclusions. But we do know that rebate checks are not free. They cost revenue and are really no different than a spending program. And most economists on both the left and right would agree that rebate checks have little long-run Laffer Curve feedback effect. Finally, there is the administrative costs of sending out over 100 million checks.

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