26 January, 2008

Self-Stimulation

From the Tax Policy Center, via Paul Krugman, the breakdown of where the Amazing Bipartisan Stimulus (lets call it ABS) rebates are going, by income quintile. As Krugman points out, the rebates going to the top two quintiles are basically useless, because, as I understand it, marginal propensity to spend decreases as income increases. Thus, the higher quintiles will spend less if any of the rebate, and add less boost to the economy. For maximum impact, the rebates should be loaded exactly the opposite way -- towards the lowest two quintiles. But even if that had been the case, there is question as to whether lower income households will spend their rebate at all when faced with looming recession and possible stagflation.

Why such an irrational policy outcome? Why, democracy, of course. Apparently irrational outcomes become perfectly rational once you reject the misconception of government as a unified actor. Republicans want to provide a stimulus that will look like some sort of positive action while actually serving their underlying ideological motivations: fewer taxes for the rich, or, at least, less income redistribution. The Democrats, now in the majority, also want to look like they are doing something. They succeeded in making the stimulus more effective to a certain extent -- Krugman notes, "it’s only thanks to the Democrats that people likely to spend their rebate are getting anything at all" -- but they are severely constrained by their weak majority and internal party divisions. Centrist Democrats get as much flak from liberal Democrats as they do from Republicans, and without party unity the Democrats are unable to effectively wield their paper-thin majority.

Much like with Iraq, it seems the outcome of this drama will look something like this: Republicans manage to block effective action on the part of the divided Democrats. But the Democrats, who are "in control" of the Legislature, will take much of the brunt of the blame. Meanwhile, policy outcomes will be largely incoherent -- which might be better than coherent and Republican -- but still, nothing good is getting done. This will always be the problem of strong oppositions in presidential systems. In a parliamentary system, an opposition party majority in the legislature would have produced a new Prime Minister, while in the US we just get two years of incoherence.

2 comments:

Cassady said...

Isn't that one of the main economic conundrums? I seem to recall that basically no matter what we do, the marginal propensity to spend goes down even if that lowest quintile (you and me, friends)gets the highest proportion of rebates. I could be wrong about this, but I also think that marginal propensity to spend is one of those quirky statistics that is very difficult to accurately predict. I mean, economists rarely take into account such fantastic products as "Jump to Conclusion" mats and Tickle-me Elmo's. Sign me up for two!

Elliot said...

Marginal propensity to spend decreasing with income is a general relationship, which, as far as I know, is uncontroversial. I don't think the size of the rebate the ABS is handing out, less than $1,000, would in itself significantly decrease anyone's MPS, if that's what you mean.

It's just that those with lower income spend a much higher percent of that income: a billionaire saves all but a tiny fraction of her yearly income, while someone making $10,000 has to spend nearly 100% of hers in order to live.

As far as I know, this is not controversial. Spencer?