Brian Wesbury, Chief Economist at First Trust Advisors, testified before Congress today on the merits of the proposed fiscal stimulus package and his policy prescription. An excerpt of his testimony (you can view it in its entirety here):
...rebates will not change the long-term path of the US economy. Consumers make decisions about spending based on their long-term income expectations, not on their current income. A rebate will not change long-term spending habits. Moreover, no retailer or manufacturer is likely to build another outlet or manufacturing facility based on a temporary consumer-oriented stimulus. In other words, temporary stimulus does not create new jobs or investment.
The expected sunset of the 2003 tax cut in 2011 is becoming a real impediment to long-term investors...The stock market is especially at risk. If the 2003 tax cuts are allowed to expire, the real cost of capital for American corporations will rise by at least 1%. This, in turn, will result in a 20% drop in US equity valuations.
...it is important that current policy be designed with long-term economic activity in mind. I propose three policy changes that would boost investment, innovation and productivity in the years ahead and help offset the virtually certain shift in monetary policy toward a more restrictive stance.
1) Make permanent the Bush tax cuts of 2003.
2) Cut the corporate tax rate to 25%.
3) Index capital gains to inflation for taxation purposes.
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5 comments:
I agree that in the long term this will have no impact on the economy, but what kind of short run impact does this have on consumer confidence? I think this temporary tax break may make consumers feel more secure about their immediate financial future. Fiscal policy has been effective in the past, but major inflationary implications are always an issue.
consumer confidence is debateable. could have a positive effect as you say it might.
long term i think its a bad move. you stimulate the economy too late and its inflationary. you do it on time and its likely to have no effect other than as a political talking point. it might be used to undermine support for extending the 2003 tax cuts (i.e. "we passed a stimulus package and increased the deficit, so now we cant afford to extend to tax cuts"), and that would have negative long-term consequences i think.
but then again, we've got to throw rational expectations out the window if we think its going to boost consumer confidence, and we've also got to wonder if he is negative/neutral/positive for business confidence (aka "animal spirits")
it was Milton Friedman who said that short-term taxes and income fluctuations do not affect long-term potential GDP. What matters...as the testimony said....is long-term income and long-term income outlook...I say we start building fiscal/monetary policy for the long-haul
Nice going
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