Should paying for an economic package last as long as ten years?

Great Debates
1

This is more of a question than a debate to me, because I know too little about economics to have a firm position. But since economics seems inherently debatable, I put this here.

I would also appreciate it if this doesn’t turn into “Republicans are only helping the rich!” “No they’re not!” debate, if possible.
Now to my question:
Bush’s stimulus plan is to cost $364 billion over 10 years. In my lifetime, the economy seems to have downturns every ten years or so. If a stim package takes 10 years to pay for, then won’t you pretty much need another one just as soon as you paid for the last one? Am I misunderstanding something (very likely, I admit) or maybe does it simply not matter if we are always paying for stim packages? Or perhaps is the idea that the plan will change the cycle such that it will delay the next downturn beyond ten years?

2

Well, first of all, the plan I assume you’re referring to is going to cost about $674B:

http://www.foxnews.com/story/0,2933,74807,00.html

Secondly, the way they figure out the costs on something like this isn’t quite the same as, say, the way you figure out how much you’re paying for your car, by counting X payments of Y dollars each and coming out with a total. This plan isn’t going to “cost” $674B in the sense that the government is going to be writing $67.4B checks every year for the next decade. That figure represents how much less the government will be receiving in tax revenue over the course of the next decade. And even then, the way they calculate numbers is pretty basic - they simply say, “Well, right now X number of people are paying Y1 in taxes, and if lower taxes, X number of people will be paying Y2, so we’ll onyl make Z.” In reality, lowering taxes generally increases the overall taxable income in this country, such that the real “cost” of the tax cuts is going to be substantially less than $674B. In fact, it’s possible to cut taxes and have tax revenue increase, depending on circumstances. That may or may not happen here, but regardless, the tax cut portion of that $674B is going to cost less.

So, getting back to your question, if you keep in mind that the cost of this package is mostly just a loss of tax revenue, should it take 10 years? Well, it kinda has to, by definition. Calculating the cost that way, the revenue loss can be seen to be arbitrarily large, depending on how far ahead you look. It’s $674B over 10 years, maybe something like $1.5T over 20 years, and infinite over an infinite number of years.

Now, there are elements of this stimulus package that don’t involve tax cuts, but the only one I can think of offhand is the unemployment benefits scheme (which is pretty clever, IMO). And that’s only a few billion, and will be payed for over two years, so it’s pretty trivial from the POV of the OP.

Anyway, I hope that answers your question at least a little.
Jeff

3

ElJeffe, I’d like to nominate you to replace all the nincompoops in the media that don’t seem to understand the points you made in your post. Good job. I could not have said it better myself (which isn’t really saying much; maybe I should say “It could not have been said better.”). I wish more people would realize that the relationship between tax cuts and how much the government collects in taxes every year is loads more complicated than simple subtraction.

4

Heh, thanks TaxGuy.

Jeff

5

Incidentally, I’d like to add that the large number of media pundits who don’t get it doesn’t bother me nearly as much as the large number of politicians who don’t seem to get it. Granted, calculating the true cost of something like this is far from trivial, but anyone in office should at least be aware that it’s not simple subtraction. grumble grumble Anyway, I hereby relinquish the soapbox.

Jeff

6

Thanks ElJeffe, that helps.