Last time I wrote that tax cuts are relatively ineffective in stimulating the economy. That’s especially true for tax cuts targeted at the top rungs of the economic ladder. Over the weekend, the Congressional Budget Office released the following chart showing the stimulative effect of various aspects of the proposed recovery package.
Stimulative effect compared
Direct purchase of goods and services by the federal government provides the biggest boost, closely followed by aid to the states spend both on infrastructure and on other items. Yet these are the three areas where most of the proposed cuts lie. So, one must ask what these centrists are thinking.
A clue may be found in this article from the Washington Post in which the Republican party, in which they hope to begin their re-birth by opposing the package. So, once again I ask, “Is their opposition based on principle as they claim or on politics?” It is increasingly looking like their goal is political advantage. Damn the facts, full speed ahead. Most economists, both conservative and liberal, argue that the economy needs a big shot in the arm. There isn’t much news out there to indicate otherwise.
Meanwhile, unemployment continues to increase as is shown in this interactive chart. What’s particularly striking about this chart is the steady growth over time and the uneven impact of job losses, both by state and by economic sector. And the January numbers — those 600,000 additional jobs lost aren’t shown in this iteration. Interestingly, many of the states with rates above the national average are represented by people who voted against the package — voting against job creation. And many economists are more concerned that the package will end up being too small, not too large.
Nearly 1/2 of the 11.6 million unemployed Americans are not receiving benefits. State unemployment funds in California, for example, are exhausted. Additionally, the people who have been trying to make do with multiple part-time jobs or who are independent contractors are ineligible for unemployment benefits if they are laid off. Using independent contractors rather than regular employees is an attractive option for employers because they can push the full payroll tax burden back onto the employee. And some industries use independent contractors almost exclusively. But more insidious is the reality that it is taking longer than 26 weeks (6 months) for people to find new employment in this economy. Benefits run out after 6 months. And benefits are financed with some of the federal tax dollars that come back to the states. But the money doesn’t come back on a dollar for dollar basis.
The most populous states — the ones who tend to be better educated and more progressive in their thinking and thus in their choice of representatives in Congress — typically send more money to Washington in the form of taxes than they receive back in the form of block grants and other federal monies. The following chart from the U.S. Department of Commerce is instructive. But like many statistics, it can be somewhat misleading unless one knows how that money is spent. For example, New Mexico gets double the dollars back that it sends to Washington. But New Mexico is also home to several Air Force Bases, two federally-owned national research laboratories, and a number of universities that receive some federal funding for research and to defray some of their other expenses.
State Ranking of Per Capita Spending, Per-Capita Tax
Burden and Return on the Federal Tax Dollar: Fiscal 2005
Ranking by Per Capita Ranking by Per Capita Ranking of Return
Rank Total Spending Tax Burden on Tax Dollar
1 Alaska 13,788 Connecticut 11,563 Mississippi 2.02
2 Virginia 12,583 New Jersey 9,947 New Mexico 2.00
3 Maryland 11,972 Massachusetts 9,800 Louisiana 1.85
4 New Mexico 10,752 Maryland 8,824 Alaska 1.83
5 North Dakota 10,391 New York 8,758 West Virginia 1.75
6 Hawaii 10,018 Nevada 8,359 North Dakota 1.65
7 South Dakota 9,590 Wyoming 8,310 Alabama 1.63
8 Wyoming 9,440 New Hampshire 8,172 Virginia 1.51
9 Alabama 9,265 California 8,047 Kentucky 1.51
10 Mississippi 9,027 Virginia 7,963 South Dakota 1.48
11 West Virginia 8,909 Minnesota 7,935 Montana 1.43
12 Connecticut 8,827 Washington 7,923 Hawaii 1.43
13 Louisiana 8,815 Delaware 7,878 Maine 1.41
14 Massachusetts 8,684 Illinois 7,844 Arkansas 1.40
15 Maine 8,654 Colorado 7,677 Oklahoma 1.35
16 Montana 8,350 Florida 7,620 South Carolina 1.35
17 Missouri 8,340 Rhode Island 7,470 Missouri 1.32
18 Kentucky 8,308 Alaska 7,215 Maryland 1.30
19 Tennessee 8,062 Pennsylvania 7,111 Tennessee 1.29
20 Pennsylvania 8,046 Hawaii 6,721 Idaho 1.19
21 Rhode Island 7,896 Wisconsin 6,671 Arizona 1.19
22 Oklahoma 7,816 Vermont 6,592 Kansas 1.13
23 Florida 7,586 Michigan 6,562 Iowa 1.09
24 South Carolina 7,531 Oregon 6,497 Vermont 1.09
25 New York 7,521 Texas 6,432 Wyoming 1.09
26 Arizona 7,500 Nebraska 6,420 Nebraska 1.09
27 Vermont 7,495 Kansas 6,359 Pennsylvania 1.08
28 Kansas 7,474 South Dakota 6,205 Utah 1.08
29 Washington 7,389 Georgia 6,143 North Carolina 1.08
30 Arkansas 7,354 Ohio 6,135 Indiana 1.07
31 Nebraska 7,289 Indiana 6,086 Ohio 1.06
32 Iowa 6,884 Missouri 6,077 Georgia 1.03
33 North Carolina 6,817 North Carolina 6,054 Rhode Island 1.01
34 Ohio 6,796 Arizona 6,046 Texas 0.97
35 New Jersey 6,771 Iowa 6,033 Florida 0.95
36 Indiana 6,768 North Dakota 6,021 Michigan 0.94
37 Idaho 6,731 Tennessee 5,989 Oregon 0.93
38 California 6,725 Maine 5,890 Washington 0.89
39 Colorado 6,670 Montana 5,586 Wisconsin 0.88
40 Georgia 6,571 Oklahoma 5,535 Massachusetts 0.85
41 Delaware 6,537 Alabama 5,436 Colorado 0.83
42 Texas 6,509 Idaho 5,420 New York 0.82
43 Michigan 6,410 South Carolina 5,337 California 0.80
44 New Hampshire 6,393 Kentucky 5,275 Delaware 0.80
45 Illinois 6,351 Utah 5,243 Illinois 0.78
46 Oregon 6,279 New Mexico 5,162 New Hampshire 0.75
47 Wisconsin 6,091 Arkansas 5,024 Minnesota 0.73
48 Minnesota 6,075 West Virginia 4,882 Connecticut 0.73
49 Utah 5,917 Louisiana 4,574 Nevada 0.67
50 Nevada 5,849 Mississippi 4,287 New Jersey 0.65
SOURCES: |
Northeast-Midwest Institute staff calculations based on U.S. Department of Commerce, Bureau of the Census, annual Consolidated Federal Funds Report, and The Tax Foundation, annual Special Report: Federal Tax Burdens and Expenditures by State. |
All of this data points again to the idea that opposition to the package is based more on politics than on principle. The opponents to the package have gotten significantly more air time than the proponents, thus magnifying their voice. And they have focused on a minuscule portion of the total package in their objections — less than 1% by most objective analysis.
UDPATE: In case you’ve been swayed by the endless prattle coming from the pundits and the Republican members of Congress, take a loot at the latest Gallup poll numbers as reported by ABC. So far, the President is carrying the day, and disapproval numbers for Congress, especially for Republicans, is abysmal. You’d think they’d pay attention if they think being “insurgents” as one of the House Republicans defined their approach (going so far as to compare them to the Taliban of all people!) will be the start of a comeback. The Taliban are revitalizing, too, so who can say…
President Obama has said that the country urgently needs Congress to pass the recovery package quickly. His advisors say that there is about 10% of the total that is in contention and that the conference discussions will be lively to be sure. In case there is any doubt of the degree of urgency, this chart from the Bureau of Labor Statistics should prove instructive.
This recession is considerably deeper than either of the two preceeding ones. There is no indication that we have reached the bottom. Indeed, there is no indication of how far we may be from the bottom. It’s time to act. This bill isn’t perfect, but given that there is agreement on 90%, the Congress really needs to come together and provide some much needed leadership. It’s no surprise that the public is tired of politics as usual.
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