Wednesday, January 30, 2008

Fiscal Stimulus Update

Alex Brill, formerly an economist at the Ways and Means Committee, emails me:

Have you noticed how the stimulus bill is shifting? Only in Washington can there be two definitions of what $150 billion means. The House and the White House wanted $150 billion stimulus in 2008 but the Finance Committee appears to define the $150 billion price tag as the 10-year cost, not the one year cost. Subtle but important difference. As a result they have increased the 2008-2009 cost to $196 billion and the ten year cost is now the "magic" $150 billion. The policy changes? More rebate checks and tax relief for firms with NOLs in 2006 and 2007 (presumably home builders and financial services companies being notable winners).
Here and here are the numbers.

Update: Jason Furman emails me a comment:

I think your correspondent gets the "only in Washington" definition backwards. The important fact to understand is that both the House and Senate stimulus plans contain bonus depreciation. That allows companies to take larger depreciation allowances in the first year in exchange for lower depreciation allowances in future years. The one-year cost of the House version is $44 billion but much of that money is recouped so that the net present value is $13.6 billion. Only in Washington (and in this case the House bill that your correspondent seems to implicitly support) would this be described as $44 billion. Any business would use a concept much closer to the NPV.

You get closer to the NPV by using 11 year nominal totals, which taking the entire bills are $117 billion for the House and $156 billion for the Senate. This does not say which is substantively better, but it is the better way to pose the question.

Also, like your correspondent I am skeptical about allowing firms to essentially get tax credits against net operating losses, it does nothing to increase the rate of return to new investment and I do not expect the improved cash flow to have much stimulative effect. But I would have thought you would have agreed with former Bush administration Assistant Secretary for Tax Policy Pamela Olson who argued, "In a perfect world, economists (of all stripes) wouldn't just permit carrybacks and carryforwards, they'd refund losses to taxpayers... So, I would say that it's a good idea, but it will cost revenue, which will have to be balanced against the benefit."

Finally, most policymakers do not realize that the "true-up" that allows taxpayers to claim the best of 2007 and 2008 adds extra complications, has no stimulative effect, and creates the marginal rate problems you identified in your earlier post. Maybe you should see if you could convince folks to drop this provision so that the rebate will be entirely a lump sum transfer, rather than mostly a lump sum transfer.

Also, The Onion gives us the latest stimulus proposal.