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Monday, September 06, 2010

The Bush Tax Cuts and Infrastructure Spending

The Economist asks:

Should the Bush tax cuts be extended?

Here are the answers, including one from me:

Tom Gallagher Yes, but only for a short period
Michael Bordo Yes, their benefits outweigh their costs
Alberto Alesina Maintain the cuts and reduce spending to trim deficits
Guillermo Calvo Yes, as the rich will drive recovery
Mark Thoma Only some, and the saved revenue should be recycled
[All Responses.]

Given the reports this morning that the administration's is about to propose a six year plan to rebuild infrastructure, I may want to rethink this part of my answer on what to do with tax revenue gained from allowing high end tax cuts to expire:

There are other possibilities as well. For example, since it doesn't look like the recession is going to end anytime soon, there's still time for new infrastructure projects. And having them kick in down the road when other types of stimulus fade away would provide insurance against backsliding. But, as with most alternatives, it's very unlikely that anything like this could pass Congress.

I still think that Congress is unlikely to go along. As for the proposal itself, here are a few details:

Obama to unveil infrastructure plan, Reuters via FT: Washington – President Barack Obama will announce on Monday a six-year plan to revamp the United States’ road, railways and runways with a $50bn up-front investment to jump-start job creation, the White House said.
The plan is one of several economic initiatives that Mr Obama is due to unveil this week aimed at generating some desperately needed US job growth and limiting predicted Democratic losses in November 2 congressional elections. ...
The argument ... is this: Democratic policies have stopped the bleeding and produced some economic growth. Yes, more needs to be done, but Republicans would bring back ideas, he will argue, that propelled the country into the deepest recession in 70 years. ...
Administration officials said he will propose making permanent the business tax credits for research, which the White House projects will cost $100bn over 10 years and would be paid for by ending some corporate tax breaks.
Other items that could also be talked about by Mr Obama are a payroll tax holiday, extending tax cuts for the middle class and increasing money for clean energy. ...

It's a bit late, and it's much too small, but I see this as a positive evolutionary step in the administration's approach to these issues. It's good politics as well. In fact, since the small size means it won't do much on its own to improve the employment situation, and given the timing of the proposal (why not six months or a year ago instead of near an election?), gaining political advantage is likely the main thrust of the initiative.

But, while it may not do much in the short-run, it does have attractive features in the longer run. There's talk, for example, of an "infrastucture bank." It doesn't have the automatic stabilization properties I talked about here, but it provides a good institutional foundation for countercyclical infrastructure policy in the future either through an automatic mechanism that ramps up infrastructure spending when the economy turns downward, or using discretionary authority. And, as argued here, infrastructure is a good investment in any case. But, again, no matter the merits, it seems unlikely that this will be approved by Congress. But I won't mind at all if I'm wrong about that.

    Posted by on Monday, September 6, 2010 at 10:16 AM in Economics | Permalink  Comments (31)


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