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How To Pass A Temporary Stimulus

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posted on Jul, 6 2010 @ 05:27 PM

Matt Yglesias on the problem of credibly committing to a "temporary" stimulus:

If we paid tons of people to dig ditches and then fill them in, I think it would be easy to convince people that we intended to stop doing that once unemployment fell. But conservatives recognize that, in general, liberals think the government should be spending more money on infrastructure projects and public services. So if we get to pass some spending increases at a time when the case for temporary stimulus is strong, who believes we’ll really give the spending up? And the same thing applies to conservatives and tax cuts.

Actually, I think there's an easy solution to this quite aside from automatic stabilizers like extended unemployment insurance, which will automatically come down as the recession eases. And that solution is: a temporary payroll tax holiday paid out of the general fund. At this point, if we're going to pass a second stimulus I think it needs to be something that takes effect quickly, and a payroll tax holiday is about the fastest possible stimulus you could ask for. What's more, it's pretty effective, since the benefits primarily go to middle and working class families, who are more likely to spend it than rich families. And making it credibly temporary isn't hard either. Just set it on autopilot with a gradual phaseout: maybe a full holiday for two quarters, followed by a 75% holiday, a 50% holiday, and finally a 25% holiday. Or something like that. That would be easy to stick to and would avoid the problem of withdrawing all the stimulus at once just as the economy was starting to seriously pick up steam.

Please visit the link provided for the complete story.

This is an idea that both Democrats and Republicans might be able to agree on. Democrats basically favor stimulus to the economy and Republicans basically favor tax cuts for the wealthiest Americans, with drastic cuts to all other government programs, especially those which mainly benefit the middle and working classes.

In Yglesias' plan each party could get what it most favors: tax cuts for the Republicans and stimulus spending for the Democrats. It might also provide an opportunity for both parties to demonstrate their commitment to the middle class, which is at this point doubting both of them.

posted on Jul, 6 2010 @ 10:13 PM
Thank you posting this article. It is an interesting proposal to solve one of today's big problems, the so-called economic downturn. Also, your perspective on the need for an act of cooperation to be rational (or at least characteristic) of all entities involved is wise indeed.

Although I found the proposed solution interesting, I think it falls short in its workability. I think it would be fantastic is an income tax holiday could stimulate the economy in a meaningful way, however, given the current circumstances this simply isn't so.

As you may know, the government is one of the largest buyers of goods and services in the United States. Consequently, if government chooses not to reduce its purchases and the money to buy those goods and services is not received via taxation it must come from one of two sources, borrowing or seignorage revenue.

The former comes with an interest fee that means taxes will have to be raised to levels even higher than they are currently to pay back the money borrowed as a result of the deficit induced by the tax holiday. Clearly, this is a bad thing in the long-term.

The latter is essentially "increasing the money supply" and results in inflation and higher prices and, thus, a reduction in the value of savings. Additionally, it results in higher interest rates which stifle economic recoveries.

I could literally write a book on this subject, but I'll leave you with some food for thought.

All the economic success or failure that we have will be the result of our collective doing. What we have in the future will be what we create today. There are no magic buttons to push or mysterious forces to coerce; economics is about producing things of value. If we can't produce goods and services of value for others then we will have nothing. If we don't invest in the technology to produce valuable goods and services and we don't educate our children in how to use such technologies, then we will not produce goods and services of value.

However, currently, the U.S. has a savings rate below zero. We are consuming more than the value of goods and services that we produce ourselves. That leaves no money for investment and a mounting financial obligation to other nations.

In the absence of a change of course, what do you think the outcome will be?


posted on Jul, 6 2010 @ 10:18 PM
While we're digging ditches, can we suggest some...erm...interesting things to fill them with?

The payroll tax holiday is an interesting idea I've not heard before. Has it ever been tried? Would it apply to both federal and state payroll taxes? Who would it go to? The employers or the employees? What general fund? Isn't it all funny money at this point? Do we even have a fund?

(How about a mortgage paying holiday to recoup some of our bailout money as well?)

posted on Jul, 7 2010 @ 01:24 AM

Originally posted by Sestias
It might also provide an opportunity for both parties to demonstrate their commitment to the middle class, which is at this point doubting both of them.

If both parties really cared about the middle class they would toss NAFTA out the window, slap tariffs on imported goods from particular nations that like manipulating currencies to manipulate trade, and stop kissing the left ass cheek of the Mexican president.

posted on Jul, 7 2010 @ 10:32 AM
reply to post by ~Lucidity

I was assuming it would go to the employees, providing direct stimulus to the workers. If it went to the employers it would just be another "trickle down" idea.

However, on rereading the post, I find that it is indeed unclear on this.

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