Moody’s on economic stimulus package.

January 25, 2008 at 5:47 am (Economic policy)
Tags: economic stimulus, economy.com, Moody's

This was issued two days ago, so the information is about the effects of different types of stimulus, not an analysis of the plan that came out today.  Now unlike the Heritage Foundation, Moody’s reputation is built on their unbiased analysis.

While the President’s nonrefundable tax rebate would help the struggling economy, a refundable rebate would be substantially more helpful. In a refundable tax rebate—favored by most Democrats—all households would receive the same size check regardless of how much they owe in income taxes. For example, at a cost of $100 billion, every U.S. household could receive a $900 check. The extra boost would come via the spending of households with very low incomes, who wouldn’t receive a nonrefundable rebate since they typically don’t owe income taxes. Moreover, higher income households that are more likely to save their rebate checks would receive less under a refundable plan.

So in their analysis, providing support to those who don’t pay federal income tax is a better stimulus if you provide rebates.  Now on to the key component in the eyes of the Heritage Foundation, the bonus deprecation, here is Moody’s take,

The economic bang-for-the-buck of bonus depreciation is very modest (see table).[7] Indeed, of all the tax and spending policies considered, it provides the least amount of stimulus. Such incentives offer a limited boost because many businesses have difficulty quickly adjusting long-planned capital budgets. Moreover, most investment is made by businesses with no tax liability in the first place. Investment incentives also complicate matters for financially pressed state governments that base their business taxes on federal tax law.

Ouch, that has got to hurt.

Unfortunately the plan that was worked out today did not include an extension of unemployment insurance or increase in food stamp funding.  This is very unfortunate as Moody’s, along with Joseph Stiglitz as reported yesterday, have said this is the best investment,

Extending unemployment insurance and expanding food stamps are the most effective ways to prime the economy’s pump. A $1 increase in UI benefits generates an estimated $1.64 in near-term GDP; increasing food stamp payments by $1 boosts GDP by $1.73 (see table). People who receive these benefits are very hard-pressed and will spend any financial aid they receive within a few weeks. These programs are also already operating, and a benefit increase can be quickly delivered to recipients.

The benefit of extending unemployment insurance goes beyond simply providing financial aid for the jobless, to more broadly shoring up household confidence. Nothing is more psychologically debilitating, even to those still employed, than watching unemployed friends and relatives lose benefits.

On the topic of permanent tax cuts for the investor class, Moody’s doesn’t think that is particularly effective,

Making permanent the current dividend income and capital gain tax rates would also be poor economic stimulus. The current 15% tax rate that most investors currently pay is set to soon expire and tax rates will jump. There is an argument that making them permanent would create some certainty for investors, who are currently uncertain about prospects for the stock and bond markets. But whatever the longer-term benefits, the near-term economic boost would be small. The problems plaguing financial markets are broad and deep and unlikely to be measurably affected by such a policy change. Moreover, even assuming with the most favorable financial markets, the stimulus potential of such a move is small; each $1 in net cost to the Treasury produces only 37 cents worth of GDP, according to our model.

Here is their very nice table that is referenced.

Their data makes government spending look a lot more effective than tax cuts.  You can see that even with the tax cuts, those that are most effective are those that target low income, rebates for those don’t pay federal income taxes or payroll tax holiday.

-Josh