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Sun Dec 9, 2012, 10:47 PM

"Why Boehner Is Just Plain Wrong On Economics" by David K. Keene at Addicting Info

Why Boehner Is Just Plain Wrong On Economics

By David K. Keene at Addicting Info



There’s also this to consider: an interesting concept called the “fiscal multiplier effect.” The basic idea is that different public policy options – whether increased spending or tax reductions – tend to have greater or lesser “multiplier effects” on the economy as a whole. So, for example, when government funds, say, a road-building project for, let’s say, a million dollars, that money doesn’t simply disappear down a black hole (whatever conservative talking heads might want us to think). A contractor is hired, he or she in turn then goes out and pays employees to do the work; buys asphalt, rents or buys equipment, and so on. In turn, those employees and suppliers spend their paychecks on goods and services, providing income for shops and businesses, banks and grocery stores, who then in turn pass it along.

Similarly, cutting taxes puts more money in the hands of taxpayers, who then have the option of spending it, saving it, investing it, paying down debt… you get the idea.

The thing is, when it comes to government fiscal policy, not all policy options are equal, when it comes to their multiplier effect. Moody’s, the multinational debt rating agency, performed a study in 2008 which looked at the fiscal multipliers for various policy options that Congress could implement to try to stimulate the U.S. economy. In testimony before the U.S. House Committee on Small Business, on July 24, 2008, Mark Zandi, Moody’s chief economist, noted that the greatest “bang for the buck” came from direct government spending – particularly on Food Stamps, extending unemployment insurance, and increased infrastructure spending. For every dollar the government spends on Food Stamps, for example, the economy receives $1.73 in benefit.

The worst payback, in terms of benefit to the economy as a whole (including job growth and impact on GDP) came from permanent tax cuts. Making dividend and capital gains tax cuts permanent – a favorite conservative cause, and one which they claim helps to create jobs and strengthen the economy – actually costs more in lost government revenue than it produces in economic activity, returning only $0.37 for every dollar of tax relief. Making the Bush income tax cuts permanent is even worse, at $0.29 for every dollar it costs the government.


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