In this week’s US News & World Report blog post, I discussed the policies that would most likely boost the flagging recovery at a time when the economy is suffering from excess unemployment and underutilized business capacity:
If policymakers want the best policies to create jobs and cut unemployment as soon as possible, they should focus on policies that boost demand for goods and services — not policies to expand the economy's capacity to supply goods and services.
I applied this logic to a key difference between the one-year tax cut extension bills that the Democrat-controlled Senate passed last week and the Republican-controlled House passed this week. Both bills extend the so-called “middle-class tax cuts” enacted in 2001 and 2003 and “patch” the Alternative Minimum Tax for 2012 to limit its reach to relatively high-income taxpayers. The House bill would also extend the upper-income 2001 and 2003 tax cuts, making the dubious argument that doing so would prevent a “job-killing” tax increase on small businesses, while the Senate bill would extend tax credits that President Obama and Congress enacted in 2009 that mainly benefit low-and moderate-income households.
I opined that the $27 billion spent to extend the tax credits in the Senate bill would likely boost economic growth and job creation more than the $49 billion to extend the upper-income tax cuts in the House bill. I didn’t have space to lay out the underlying analysis there, but here it is:
For $27 billion of tax credits to generate the same increase in gross domestic product (GDP) or employment as $49 billion in upper-income tax cuts, the tax credits would have to have a GDP-bang-for-the-budgetary-buck that is nearly twice as large. In fact, the evidence suggests a much larger difference.
The economy would benefit greatly from a bold plan combining temporary, high bang-for-the-buck policies that provide more support for the economy in the next year or two with a balanced plan for stabilizing deficits and debt in the longer term that begins to take effect in a few years when the economy is stronger. It’s hard to see how the House bill — which compared with the Senate bill adds more to the deficit, does less for the economy, and makes inequality worse —moves the ball in that direction.