Well, it’s hard to choose these days. The resurgence of Keynesian economics shows how fragile and insecure economists are in general. They are, of course, important exceptions. But while I have a special dark place in my economist heart for the New York Times‘ columnist Paul Krugman, I think today the prize should to economist Mark Zandi, of Moody’s Economy.com.
Zandi is constantly quoted in the media as the go-to-person on what do for the economy to recover. For instance, how many stories have we read in the Washington Post saying “nearly all economists support the stimulus,” with for only evidence a Zandi quote. Many. Who cares that Zandi’s model shows that the stimulus is working because the answer is built into the equations of Keynesian models. Here is a job for an economist: Take apart and demolish these reality-defying macro models once and for all.
The media loves him and as a result there are countless quotes of him out there about how we need more government intervention into the economy to jump start the economy, how passing the $800 billion stimulus bill would create jobs, how more spending programs are yet still needed.
For years, he has mainly been wrong on economic issues. For instance, this is the guy who was warning us in the last eight years about the effects of a 3 percent of GDP tax cut created deficit on the economy (here). Yet, he is not that worried about a 10 percent deficit when the rebate checks that people received in 2008 and also in 2009, in the name of stimulating the economy. He thought it was a great idea to send people checks in order to increase consumption and increase the aggregate income. In Newsweek he wrote, “The key is the rebate checks taxpayers are receiving this summer–worth more than $100 billion. Without the rebates, households would be cutting back on spending, and there would be no debate about whether we are in a recession.”
Wrong. People spent little if anything of the temporary rebate, and consumption did not recover.
The chart shows how personal disposable income jumped at the time of the rebate while personal consumption did not increase noticeably.
The theory of economic stimuli from tax rebates suffers from several serious problems, the main one being that it assumes people are stupid. Tax rebates presume that if people get some money to increase their consumption, businesses will expand their production and hire more workers. Not true. Even if producers notice an upward blip in sales after the rebate checks go out, they know it’s temporary. Companies won’t hire more employees or build new factories in response to a temporary increase in sales. Those who do will go out of business.
Formal statistical work by Joel Slemrod, a professor of tax policy at the University of Michigan, has shown that rebates and tax credits generally produce no statistically significant increase in consumption. Are you listening Zandi? Obviously not. Today, our hero is arguing for the implementation of a tax credit for new hires to jump start the economy.
“If you wanted to give some juice to the job market towards the end of 2010, the best thing probably would be a jobs tax credit with a twist. You’d say, ‘I’ve got $25 billion to spend on this_ first come, first serve.’ You do a ‘cash for clunkers’ on the tax credit,” said Zandi, chief economist for Moody’s Economy.com.”
As this quote suggests, The only purpose of the tax credit would be: not a long term recovery, but an image boost for the democrats before the 2010 elections. And here is the interesting part. According to the National Federation of Independent Business, small businesses are opposed to tax credits for new hires. And NFIB should know, since it is the biggest association of independent and small businesses in America.
“Our member surveys for plans to add inventory and plans to hire are all coming in at 35 year lows. They have no reason to hire anybody because they don’t have anything to do. That’s why the tax credit is a silly idea,” their chief economist said.
So please, can the media stop calling Zandi? They should call me instead. I have lots to say about the economy.