You Know, You’re Right, Robert Reich Is Ignorant Of Economics

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So here we’ve got Robert Reich telling us all what should be done about the coronavirus. Tax cuts would:

But they would be useless. They’d be too slow to stimulate the economy, and wouldn’t reach households and consumers who should be the real targets. And they’d reward the rich, who don’t spend much of their additional dollars, without getting money into the hands of the poor and middle-class, who do.

In short, our imminent coronavirus and economic crises won’t respond to trickle-down economics.

Instead, Congress must immediately enact an emergency $400 billion.

So, instead, we should:

The money should be used for

1. Coronavirus testing and treatment.

2. Paid sick leave and family leave this year, renewable for next year if necessary.

3. Extended Medicaid and unemployment insurance.

4. Immediate one-time payments of $1000 to every adult and $500 per child, renewable for next year if necessary.

And yes, that shows that Reich is just as ignorant of economics as he was back in the 1990s when Paul Krugman snarled at him.

Giving people free money runs into a problem called Ricardian Equivalence. People are not stupid, they know that freebies now have to be paid for at some future point. So, they save the money and we gain no stimulus from this.

Like so many such ideas this is true of a few people all the time, no one none of the time and most of us some variable amount of it. What matters is that average effect.

And we’ve some information on this. Under Shrub there were two attempts at stimulus. One was sending out those stimulus checks for a few hundred bucks each to everyone. They tended to be saved – or used to pay down debt, economically the same thing. What’s Reich proposing? The same thing we know doesn’t work. And he’s justifying it by saying that we can’t use tax cuts because the rich wouldn’t spend the money.

Sigh.

The actual answer being to cut taxes on the poor. Exempt, say, the first $1,000 a biweekly paycheck from FICA collection for the length of the crisis. Insist that all benefits continue to accumulate even so. This is extremely progressive – it’s a much higher percentage of a poverty line paycheck than it is of one further up the income scale. And for Europeans – FICA taxation applies from dollar one of labour income. There’s no minimal income exemption as we often have.

That is, using exactly the logic that Reich does, but informed by actual economics and observation of reality, we come to the opposite conclusion than Reich. We should cut taxes to provide stimulus, not send out free money.

How do we know this? The other part of the Bush Admin stimulus was to cut FICA. Which worked – the smaller amounts in each paycheck people went out and spent.

Actual knowledge when designing policy. So useful, don’t you think?

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Boganboy
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Boganboy

If they really want to do something about coronavirus, I’d say free booze is the way to go. That way we can all get sozzled and calm down.

Grendel
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Grendel

Didn’t many of the beneficiaries from PPI mis-selling just spend that money straight away on new stuff? So this isn’t always true. You’re probably absolutely right in this case though, as many people would likely be worried for their future in this environment and would therefore hoard resources, not spending the money unless they had no choice. Ironically, helicopter money would therefore only really provide stimulus in an economy not in crisis that doesn’t need it. Benefits and lower taxes for those most affected would seem a better and fairer way to avoid suffering whilst achieving a no worse stimulus… Read more »