Thursday, February 12, 2009

Alternative Stimulus Plan

This post relates to the following Keystone Economic Principles:
1. We all make choices.
2. There ain’t no such thing as a free lunch.
3. All choices have consequences.
4. Economic systems influence choices.

You can file this as "water under the bridge" but it's still an interesting mind exercise. There is an interesting video (HT to Cafe Hayek) that could generate a lot of class discussion. I suspect the video was meant as a slam of the stimulus package. But like so many short, sound-bites on the news, it doesn't go far enough.

It was done by an economics student at George Mason University. And I've heard other variations on the same theme - remove taxes for a period of time. In this case it's the payroll tax ("Who is this guy, FICA, and why is he taking my money?") I've also heard it proposed for Federal income tax withholding, but the concept is sound - who can do a better job deciding what to do with the money - bureaucrats or consumers?

But there are a lot of additional questions that occurred to me as I watched the video: To what extent would people save/spend the extra amount in their paycheck (marginal propensity to consume)? What impact would cancelling the payroll tax have on the viability of other programs (Social Security / Medicare)? Is a payroll tax cut fair (directly helps only those currently employed)? What is the value of the multiplier for a tax cut of this kind?

What are some other questions the video raises for you and your students? I welcome your comments and their reactions.

My guess is that the idea floated in the video wouldn't have this problem.

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