How effective are tax cuts as stimulus?

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Economics of Contempt and David Leonhardt argue they're surprisingly effective:


In truth, the best place to look for nonpartisan expert analysis is the Congressional Research Service. The CRS is Congress' private think tank; it's staffed with experts on every conceivable area of policy, both substantive and procedural. CRS analysts are true experts in their field, and they do a great job sifting through the academic research and highlighting the most reliable results. Congress is fiercely protective of the CRS--the CRS's memoranda to Congressmen and Senators are confidential, and, amazingly, CRS reports aren't free to the public. (OpenCRS.com usually has slightly older versions of CRS reports, which are updated frequently.)

So to cut through all the partisanship surrounding the stimulus debate, I went to the CRS reports (which my firm bizzarely pays for). The one thing that surprised me in reading over all the relevant CRS reports is that the recent evidence on tax rebates shows that they're actually quite effective as stimulus.

That doesn't mean they'd work as well this time around, of course--consumer demand for savings has clearly gone way, way up.  But it does give one pause.

On a practical level, I think tax cuts have to be part of any package that hopes for quick action.  As I said in my Bloggingheads with Brian Beutler, the government does not have a lot of mechanisms for spending money quickly.  If you really want to shove money out the door, you need to do it through existing transfer systems:  unemployment, welfare, food stamps, and of course, our friend the IRS.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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