Leonhardt Gives Obama Too Much Credit: There Was Little Policy Reason for Structure of Make Work Pay Tax Credit

January 13, 2020

CEPR

David Leonhardt argues in his column that Democrats have to make the benefits of government more visible to people and criticizes them for failing to do so. While he does have a very good point, he ignores all the ways that conservatives (defined as people who want to redistribute money upward) use the government to structure the market to give more money to those on top.

This includes items like longer and stronger patent and copyright protection and trade deals which are designed to subject manufacturing workers to competition with low-paid workers in the developing world, while protecting the most highly paid professionals, like doctors and lawyers. This stealth effort has led to enormous upward redistribution over the last four decades, which economists and reporters at elite news outlets like the New York Times then attribute to the blind forces of technology and globalization.

But apart from this more general point, Leonhardt seriously misrepresents one of the major policy decisions he criticizes. Leonhardt tells readers;

“Out of a well-intended desire to get Americans to spend more of their stimulus tax cut, the administration snuck the money into people’s paychecks, rather than sending one-time checks (as George W. Bush had done in 2001) that families might have saved.

“Economically, it worked. Spending rose, helping to end the financial crisis. Politically, it was a dud. Many Americans gave Obama little credit and voted for Republicans in the 2010 midterms, virtually killing his larger legislative agenda.”

The issue was not a zero/one question of spending versus no spending. The issue was the percentage of the tax cut which would be spent. At most, the decision to have the tax cut slipped into people’s paychecks, rather than a one-time check from the government, increased the share that would be spent by 10 percentage points.

The tax cut was roughly $60 billion a year in both 2009 and 2010. This means that a high-end estimate of the addition to spending would be $6 billion a year. If we add in a multiplier of 50 percent, this would imply an increase in GDP of $9 billion a year as a result of this method paying out the tax cut. In a $15 trillion economy, this implies a boost to growth equal to 0.06 percent of GDP, an increment that is far too small to be noticed by the public.

This point is important, because the plausible impact on growth from hiding the tax cut in people’s paychecks was trivial. On the other hand, the lost in political goodwill from not sending out a check, as George W. Bush had done, was substantial.

The Obama people did not sacrifice politics for the good of the economy, they sacrificed politics to be able to conduct an experiment in economic policy. It proved to be a very costly experiment.