My Brain Hurts

I just plowed through this paper by Christina and David Romer, noted Cal-Berkeley economists. Christina, in fact, is the recently named chair of Obama's Council of Economic Advisers.

I don't suggest reading the paper. It hurts the think-box, so I will do my best to sum it up for you:

1. Tax cuts in a healthy economy (one that shows sustained growth, strong manufacturing and economic balance) can end up seeing a threefold return on investment. In other words, for every dollar you cut taxes, your economy sees $3.00 of gain.
2. Tax cuts in a struggling economy (erm, ours) show a net loss for the economy as a whole; for every dollar cut, you infuse $.99 into the economy.
3. Tax hikes in a struggling economy (ours again!) show a net gain for the economy as a whole; for every dollar taxed, you infuse somewhere around $1.30 into the economy.
   

The interesting part, and the part that the paper omits (or is unconcerned with, or doesn't measure) is what happens when tax breaks are given to one part of the economy while hikes are given to the other? After all, the argument against tax cuts as a means to get out of recession/depression is that, in tough times, people save money. If they're saving, they're not spending, and if they're spending, the supply/demand balance maintains grossly tipped towards the former.

However, what happens when you're giving tax cuts to the portion of the society that's more likely to spend it? Small businesses for one, comes to mind. The working and lower-middle classes do as well. These are the segments of society that have seen their disposable income dip precipitously over the past decade, to the point that another dollar in their pocket now is very likely a dollar that's going to go right back into the economy, rather than under the bed as it would have 50 years ago.

And these are the parts of society where Obama's new stimulus plan will cut taxes and create jobs. There's still some amount of consternation about the mathematics of this whole thing - and I'm not smart enough to figure out who's right and who's wrong - and it does fly in the face of Keynesian economic philosophy, but I like the idea of treating the symptom (by giving tax cuts to people and businesses who will spend) as well as the disease (by raising taxes on corporations and the richest 5%). It makes intuitive sense.