Strange bedfellows?

I've been somewhat confused by the skepticism regarding the news that Obama's stimulus plan is largely composed of tax cuts - about 40%. Krugman Lefties think he's succumbing to Republican pressure, others fret that the tax cuts will essentially amount to welfare payments because only people making less than $200,000 a year will qualify.

I've noted before my shock that prominent academics are divided over this issue. But to be frank, I'm following this with cautious optimism (let's keep in mind that the bill has to pass!). Here is a politician actually fulfilling a campaign promise and proposing an idea that both sides of the aisle can get behind.

Until the bill passes speculation remains just that, but what really counts is how the cut is implemented. I agree with Cowen that the tax cuts probably won't drive recovery:

but less money will be wasted and...it shows that the Obama team is willing to flinch and be realistic.

When we're used to hearing figures in the hundreds of billions, saving a little money probably isn't the worst thing in the world. People may not spend the money, but if it helps people avoid defaulting on personal loans or expands credit to enterprise where it wasn't before then that's one less loan the government has to guarantee under TARP.

There's also a bit of pscyhology wrapped into this proposal. Unlike the Bush tax cuts where citizens received one large check in the mail, Obama's plan has a smaller portion taken out of each paycheck. Does this signal a move away from encouraging consumer spending and instead focusing on personal fiscal responsibility? Probably not, but it's an interesting tactic.

Predict(able)

Obama may be on vacation, but his proposed stimulus plan has garnered alot of economic debate, which is certainly not of the post-partisan variety. In case you haven't been following it, the huge surprise is a back and forth between Mankiw and Krugman. Shockingly they're duking it out over whether tax cuts or government spending is more efficient to spur economic growth. 

These are both very, very intelligent men, but lest we find ourselves trending to whatever side our political inclinations may lead, let us keep in mind that forecasting is hard. And if it's hard to predict oil or food prices, how can we seriously hope to predict what this stimulus will produce; especially when economic historians still debate the exact causes and escape mechanisms of the Great Depression. 

What we must admit and accept is that the experimentation and bold action our current situation requires could easily be hampered if we require historical precedent. This is not to say that healthy and vigorous debate is not needed; it most certainly is. But let us not forget that debate should eventually produce some action. For now, we can only hope that today's recession fears go the way of the Y2K bug, but until history proves that view, let's have something more than words in place. 

Try, try again

Last week I blogged about how New York would almost certainly face serious problems due to the loss of taxable revenue from Wall Street. Guess what?

Mayor Michael R. Bloomberg’s budget director ordered agency directors on Tuesday to cut spending by a total of $1.5 billion over two fiscal years, starting with the current fiscal year, which began on July 1. The spending reductions come as the mayor is floating the idea of a 7 percent property tax increase on homeowners, a move that could generate an additional $600 million in revenue each year.

Try again, buddy. Instead of subsidizing projects in areas that could bring in serious tax cash for the city in addition to making up the differences of rent controlled apartments, let markets developers do their job. You're still gonna be short but if you are seriously thinking about running again (and having enough support to change the laws to allow it) higher taxes ain't the ticket. Not this year.

On bailouts and buyers

Not to make light of the recent troubles on Wall Street but Megan McArdle echoed today a thought that had been running through my head given the bailouts, conservatorships, or whatever the Paulson and the Fed want to call their actions to keep Americans happy.

All of New York's rebound has been paid for by taxes on the financial industry -- a few hundred thousand people in the industry pay the lion's share of taxes for the entire city. Tale them away, and the city will rapidly lurch bak towards bankruptcy.

One question. Is Bloomberg going to bailout the City if the Korea Development Bank doesn't bite?

(Photo by Christopher Chan)

How to win the crucial economists' vote

Greg Mankiw, a very well-respected economist and prodigious blogger, had a piece in the New York Times this past weekend about the policies the candidates would adopt if they were courting Economists' votes. I encourage you to read the whole entertaining article, but here's the gist of it:

1. Support free trade
   
2. Oppose farm subsidies
3. Leave oil companies and speculators alone
4. Tax the use of energy
5. Raise the retirement age
6. Invite more skilled immigrants
7. Liberalize drug policy
8. Raise funds for economic research

I'm personally ambivalent/in cautious agreement with number 7, and I imagine number 8 would amount to some heroic pandering to the dismal scientists. That said, I do agree with numbers 1 - 6, and I agree particularly strongly with 1, 2, 4, and 6. There is a lot of material here, but I'll take number 6 right now because it strikes me as the most straightforward case.

Invite more skilled immigrants. Whatever your thoughts on immigration in general, skilled immigrants, particularly younger ones, are a big "get." They generate a lot of economic value. They make a lot of money, a lot of which gets spent in their country of residence, and they pay higher taxes, which go to funding schools, police, Medicare, etc. Like the affluent in general, they are less likely to put a strain on social welfare systems. Finally, there's little worry that they'll take all the jobs away from local workers (don't make me post the South Park clip again.) First, forget the old Lump of Labor Fallacy. Then recall that truly skilled workers tend to be in high demand and have less trouble finding employment. Having more skilled workers in the economy should also increase economic growth, thereby creating more demand for skilled workers overall.

I'll return to some of the other issues in the future, because they're timely and important as the election approaches. Also, I would be interested to see what my esteemed coauthor thinks about some of these issues. And you too, dear reader. Hit up the comments below.

n.b. I do not particularly want to hear from Lou Dobbs, possibly our country's most pompous blowhard. Stick around until about the 2:50 mark, though, because he starts to go on a very angry, hilarious rant: