The best way to move the economy

Robert Reich

TEXT OF COMMENTARY

Renita Jablonski: What would the perfect stimulus package look like in your mind? Republicans and some Democrats want more tax cuts and less spending. It's a popular position because tax cuts are pretty popular. Plus a lot of people think they know how to spend their money better than the government does. Commentator Robert Reich says the focus needs to be on the best way to get the economy moving.


Robert Reich: Most economists agree that government spending has a bigger stimulative bang than do tax cuts. According to calculations by Mark Zandy of Economy.com, each dollar of spending generates about a dollar and a half of stimulus, while a dollar of tax cuts generates far less.

There are three reasons. First, most people who receive a tax cut don't spend all of it. They use part of it to pay down their debts or they save it. Most of us did one or the other last spring with that tax rebate. Now from the standpoint of any particular individual, paying down debts or saving may be smart behavior -- even commendable.

But what's intelligent for an individual does not necessarily translate into what's good for the economy as a whole. The only way to create or preserve jobs is through additional spending. And unlike tax cuts used to pay down personal debt or add to savings, every dollar of government spending flows directly into the economy and adds to overall demand.

Second, even that portion of a tax cut we might actually spend doesn't necessarily go into the American economy. It goes all over the world. Now I have nothing against creating or preserving the jobs of Asians who assemble those flat-panel TVs you see at the mall, for example, but right now we're trying to create or preserve jobs here in America. By contrast, when government spends to repair a highway or build a school or help pay for medical services, the money and the jobs stay here in America.

Finally, those who say cutting taxes on businesses is the best way to create or preserve jobs forget about the demand side. Even with a tax cut, businesses won't hire workers unless there are customers to buy what those workers produce. A government stimulus that creates jobs is a necessary precondition.

This isn't a matter of more or less government. It's just economics. When consumers and businesses can't or won't spend enough to keep the economy going, government has to be the spender of last resort.

Jablonski: Robert Reich teaches public policy at the University of California, Berkeley. His most recent book is "Supercapitalism."

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