Framing the stimulus

By Megan McArdle

As talk of stimulus plans grows, readers are asking for my thoughts. Which are: stimulus rarely works unless it is massive and very rapidly applied, and if it is massive and very rapid, it usually has much larger problems.

The difference between tax cuts and spending is irrelevant in theory. In practice, because so few people pay significant income tax, it has distributional effects. Since rich people seem to save more money than poor people, this blunts the effect of the stimulus. On the other hand, spending is generally much more distortionary than tax cuts, because the government picks what the money is spent on. One more reason not to like fiscal stimulus packages.

The most interesting point, which no one is paying much attention to, is that it may matter how you frame the stimulus. The fiscally responsible thing to do is to make the stimulus temporary, something Clinton is emphasizing in her speeches. However, there is some evidence that if you tell people your stimulus is temporary, it doesn't work so well. This matters particularly with tax cuts: Nicholas Epley of Chicago (then Harvard) has a paper indicating the Bush administration's decision to frame its stimulus as a rebate, rather than a bonus, may have affected its usefulness.

This article available online at:

http://www.theatlantic.com/business/archive/2008/01/framing-the-stimulus/2582/