The graph shown is for the “economic multiplier”, ie. for every $1 invested how much return we see in long run GDP. However, I have never seen any type of multiplier analysis even close to what the graph is showing. For example, extending unemployment benefits has a multiplier of 1.63? Numerous studies have shown extending the duration of unemployment benefits only increase the unemployment rate (that’s even in my Econ 101 textbook, though I doubt many of the commentators on this site own one).

Tax cuts stimulate the economy for two reasons: 1) you are providing works with more incentive to work harder, therefore you increase worker productivity and 2) workers will simply have more money to spend/save/invest as they see fit. For example, Christina Romer (Obama’s new chair of the Council of Economic Advisers) found an economic multiplier of 3 for tax cuts:

http://www.econ.berkeley.edu/~cromer/RomerDraft307.pdf

If Obama had such a smart choice for (some of) his economic advisers, why on earth did he outsource the writing of this stimulus package to pelosi and the house democrats?

On a final note, the problem with huge outlays in government spending (such as this stimulus package) under the auspices of “stimulating the economy” is that everyone makes the case that their own special interest has the “best bang for the buck” for spending .. accordingly you guys all argue $1 invested in science and technology by the government is the best way to grow the economy .. maybe you’re looking out for your own tax payer funded jobs

then it only relates the one year $ change/return in gdp which is how the graphic should be labeled

“In particular, if money is fungible, why would a person treat increased unemployment benefits differently than a tax rebate check?”

I’m no economics expert – perhaps nobody is – but maybe the person on unemployment is more likely to be in such dire need that he has no option but to spend the money just to provide basic necessities such as food and rent, whereas any tax rebate check I get will go straight into the bank, and the money will stay there for quite a while. I will probably just have more money in the bank the second before I die, after which, of course, I will no longer maintain possession of it.
Quite frankly, I’m not even sure what we mean by “stimulate the economy.” Do we mean raise the GDP, create more economic activity, increase the production and delivery of goods and services? If the GDP rises and the median income declines, will we say that the economy has improved?

Zandi is just one of many economists who have spoken on this subject and as others have noted, his group has put out some debatable stats about the effects of different spending/tax changes. In particular, if money is fungible, why would a person treat increased unemployment benefits differently than a tax rebate check? He claims the tax check would be put towards paying down debt and yet claims that people will spend any income support they get very quickly. Its difficult to have this both ways unless the income support is greatly in excess of the tax credit.

Here are a few conflicting views:
http://online.wsj.com/article/SB123258618204604599.html
http://www.politico.com/news/stories/0109/18068.html

and a full page ad/list of those economists who think its not so good:
http://www.cato.org/special/stimulus09/cato_stimulus.pdf

One can quibble with the model assumptions, but it is hard to imagine that it is so wrong that it could turn a 30-cent-return on corporate tax cuts into a net positive return. So, yes, Sili, I really do believe that if people were educated about this, the argument in favor of tax cuts would be squelched, definitively.

squelch definitively the incessant chant for tax cuts

HAH!

Do you really believe that? When has facts and reality ever come in the way of the Republan politic of lining the pockets of one’s chums? I’m no USAnian, but I do prefer “tax and spend” to “spend and spend”.

Now if we could get rid of the incessant box ticking and middle management we’re incumbered with over here in the name of ‘quality control’, then we might even get to spend that money sensibly. I have long ago learned that ‘quality’ in the mouth of a politico means ‘quantity’. Wankers.

There seems to be some possibly misleading assumptions behind this chart. For example, how did Moody’s calculate the effect of “making Bush income tax cuts permenent”? Suppose they assumed that *all* taxes would go up in 2009, and then computed the GDP gain at the end of 2009 of “spending” *only* on the Bush income tax cuts. That might amount to a net tax increase with no increase in other spending in Moody’s model — of course that’s going to have a negative return for the economy!

You have to understand, most of the things Republicans consider ‘waste’ only sound like it to people who don’t rely on it. A town with an extremely popular waterpark might request funds to repair it. Without those funds the waterpark will fail and the town might wither and die. Meanwhile their tax dollars are no longer taken to the government, their purchases no longer make their way back into the economy. Meanwhile, all the government saw to slash was ‘waterpark’. Money sent back in -any- form into -our- infrastructure will return. Money sent overseas will not.

Besides, after 8 years of digging our economic grave Republicans have absolutely no room to talk about fiscal responsibility. While in power they could have reigned in Bush anytime they wanted, or proposed their own fixes. They didn’t. Now its up to a new administration to clean up the mess.

I’m not in favor of high end tax cuts, but the recent lamenting that Americans are saving too much and not spending enough smacks of Bush-era consumerism. If the key to this is the liquidity in the banks, than how is people saving money in banks a problem, exactly? The banks are going to loan that money out, not make piles of it and roll around in it.

Infrastructure sending sounds fine. But if that’s so stimulating, why is the bloated $260 billion highway bill passed just two years ago not stimulating the economy? If deficit spending helps, why is $1.2 trillion in deficit spending not enough? On the flip side, if tax cuts for the middle class are so hot, how come the $150 billion “stimulus” of last summer didn’t work?

It seems to me that while some spending is good idea, the idea that all spending is good spending has to be false. And if we continue to rack up debts, we risk inflation.

Far better results could be gotten by reforms that won’t cost the government a penny — like simplifying the byzantine corporate tax system, overhauling financial regulation or removing the perverse incentives that move businesses offshore.

As for price as the force which moves spending, my guess is that in the current context consumers’ expectations of their future incomes and liabilities is likely to be a more important influence on how much of their additional income they spend. See the permanent income hypothesis (it is an accepted theory now, but the name has stuck).

I think we know the answer.

What I worry about is that this point is rapidly being lost among the party in power. I’m generally a progressive, but I must agree with the minority at times about the conflation of short and long-term priorities. Let’s face it: Our transportation infrastructure is in dire shape, our water and waste treatment infrastructure is not much better, schools are in shambles, several banks are about to collapse, our biggest manufacturers are on the verge of near concomitant failure, home values are deep underwater…it just goes on and on. The whole point behind this trillion-dollar madness, so I thought, was that if we don’t blow a serious wad on immediate job-creation and consumer-cash infusion now, in the future the state of our R&D will be the least of our worries.

I, for one, am growing less and less convinced with each article I read that the stimulus is being targeted in an effective, non-ideological manner, any more than I think for one moment Republican opposition isn’t market-fundy voodoo. In other words, I’m not sure if the bulk of it is remotely stimulatory, and if it isn’t, I’m not sure what the point is, other than grabbing for pork.

Let the taxpayers decide what to do with their quick new cash, pay off a credit card, pay down the mortgage, save it in a bank, invest it in a market, or spend it in Detroit or in Alabama. OK, somebody might buy some plastic stuff from China. So what? Who needs a “multiplier” for a politically neutral program that can be scaled up fast?

JK Galbraith’s chart on Mo Jones is politically motivated. Macroeconomics has no predictive powers.