In
What Are The Key Ingredients of Fiscal Stimulus and
Fiscal Stimulus - Unlikely To Work in the Real World I argued that any fiscal stimulus package was doomed to failure as it was impossible to meet all three necessary conditions of fiscal stimulus at the same time:
- Provide Stimulus Through Use of Idle Resources
- Started Quickly
- Perform Reasonably Well on a Benefit-Cost Test
Economics superstar Greg Mankiw has come up with a
form of stimulus involving taxation. It does not quite meet the three criteria, but it comes closer than most plans. As a bonus, it has environmental benefits!
Greg Mankiw's Green Stimulus Plan
The plan is simple enough that Prof. Mankiw described it in a single paragraph:
"I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift."
Anyone who is familiar with Prof. Mankiw will instantly recognize the tax increase portion of the bill part of his overall
Pigou Club proposal. Overall I have been frustrated by economists and politicians using fiscal stimulus as a way to implement their pet programs. Overall, here, I am not too bothered by it, since the idea has merit, but I admit as a member of the Pigou Club, I am probably biased.
We can see how the plan would perform as a stimulus package by considering the three necessary conditions of fiscal stimulus.
Provide Stimulus Through Use of Idle Resources
This one is the most difficult to measure. The theory behind the payroll tax cut is that it will give incentive for firms to hire more (or at least fire less) employees, as the cost of labor has now decreased. What we do not know, however, is how much this will change the behavior of employers and how much of this tax cut will simply be pocketed by the company. If most of it is the latter, it can still have a stimulus effect though it would not act any differently than just giving every business in the country a rebate check.
Started Quickly
A program such as this one would need to be "made law and pass all the necessary checks and balances." It could not be started immediately. However, unlike a program of infrastructure spending, it would not need to go through rounds of competitive bidding and environmental assessment, so it is faster in that sense. However, it is slow in the sense that it may take time for businesses to hire new workers, which is one of the goals of the program. Overall it is likely to be faster than traditional fiscal stimulus, but for a short recession it still may not be fast enough.
Perform Reasonably Well on a Benefit-Cost Test
This is almost certainly a win, as there is a
deadweight loss attached to payroll taxes, as discussed in
Payroll Tax Reduction - One Approach to a Carbon Tax. There may not be a deadweight loss to increased gasoline taxes. The gasoline tax does reduce the disposable income of households and reduce their marginal trips (bad), it also reduces externalities such as air pollution and traffic congestion (good). It is not obvious if the bads outweight the goods - I suspect it depends on the subjective valuation you place on clear air and/or reducing CO2 emissions.
Conclusion on the Mankiw Stimulus Plan
While the Mankiw Stimulus Plan does not entirely meet the three criteria, it comes closer than most. Although I could be described as a stimulus skeptic, I would support such a plan. It is a moot point, because I cannot see any government, anywhere, actually implementing anything like this.
