Read the whole post, for Greg's full set of prescriptions, but this idea I had not previously considered:
I recognize that some state governments are now struggling in light of
the macroeconomic crisis. For the next two years, I would let each
state governor have the authority to divert a portion of the payroll
tax cut in his or her state and take the funds instead as state aid.
This provision would essentially be giving governors the temporary
authority to impose a payroll tax on his or her citizens, collected via
the federal tax system. Those governors who think they have valuable
infrastructure projects ready to go would take the money. When
designing a fiscal stimulus, there is no compelling reason for one size
fits all. Let each governor make a choice and answer to his or her
state voters. It is called federalism.
the macroeconomic crisis. For the next two years, I would let each
state governor have the authority to divert a portion of the payroll
tax cut in his or her state and take the funds instead as state aid.
This provision would essentially be giving governors the temporary
authority to impose a payroll tax on his or her citizens, collected via
the federal tax system. Those governors who think they have valuable
infrastructure projects ready to go would take the money. When
designing a fiscal stimulus, there is no compelling reason for one size
fits all. Let each governor make a choice and answer to his or her
state voters. It is called federalism.
And here is Greg on the broken window fallacy, worth a read.
NO NO NO
Working deep within the bowels of the fiscal apparatus of one of those “struggling states” I can
tell you Mankiw is committing the “ceteris paribus” fallacy. My “struggling state” is postponing
raises, cutting staff, raising taxes (fine, I have a bias) and postponing road and bridge repairs..
All while giving a publicly traded private company (Norfolk Southern, known to operating
craft employees as “Nazi Southern”, but increasingly looking like Norfolk Socialist) a 27 million
dollar grant. The problem isn’t to little money-its too little spending. NS isn’t poor-they
spent and spend a ton to run an executive train run by refurbished 1950′s “F-units” (Google “NS 4270″)
Greg, this isn’t hard. Would you throw a few quid to a credit-card abusing shopaholic and consider it
a fix?
That is the best plan so far, block grants to states and a reduction in payroll taxes. Payroll tax reductions benefit everyone with more impact on lower income workers. It maintains incentives to work.
State block grants let state governments decide how to allocate funds. Some will be spent on infrastructure, some will be spent on social services, some will be wasted on politically connected players, but on balance it will be more responsive to voters then the Pelosi pork projects.
Problem is that it is too simple, too likely to work, and does not keep enough control in Washington
The Parable of the Broken Window is exactly what some economists and advisers of previous years and administrations are trying to do: first they break your windows (all of them), then they tell you that you may need double glazing and eventually they claim fees for advising you and commission for reconstruction. These are economists (and bankers) nowadays…They may even send burglars with some bailout plan.
Why would spending decisions of a government – either federal or state – be preferable to spending decisions made by the 140 million or so workers of this nation? Screw the economists and their multiplier conjectures! It’s about freedom!
If the citizens of Texas want to increase their state taxes to build more roads, they have legislators who can represent their wishes and make that happen. Why would we ever want to bypass the state constitutional processes in place to set up some sort of panic tax-and-spend scheme?
andrew: “Does this really help states other than those that don’t already have income taxes?”
Not sure why you distinguish income taxes from other forms. Texas doesn’t finance government activities with income taxes but rather through the highest property tax rates in the nation.
Note first that the property tax rates are really high because housing is quite cheap in Texas, one of its clear public policy advantages. It takes higher rates to bring in the same amount of revenue.
The reliance on property taxes rather than income taxes is part of why they deal a lot better with immigrants and illegal immigrants than California. It’s a lot easier to hide income than a house or car. Immigrants in Texas pay their fair share of taxes, by and large, and there isn’t so much grumbling about the state wasting money on people who don’t pay taxes.
Bob Knaus: “the usual ways states pay for infrastructure (fuel taxes, sales taxes) are also highly regressive.”
Not sure how you define “infrastructure”, but much of the local roads, sewers, flood control structures, etc, are financed through ad valorum property taxes. How would such taxes be considered regressive? I suppose anything other than a soak-the-rich tax would be classified as “regressive” by a liberal wealth-sucker.
If fuel taxes were used solely to fund highways, we could dismiss the classification of “regressive” or “progressive” by pointing out these are user fees. But gasoline fuel taxes also fund inner city rail and bus transit systems. Because the wealthier suburban drivers are subsidizing lower income mass transit riders through the fuel tax, shouldn’t we classify fuel taxes as moderately progressive?
John Thacker: “Note first that the property tax rates are really high because housing is quite cheap in Texas”
I disagree, Mr. Thacker. Property taxes were much higher in Texas long before the property value differentials were so large. Texans chose property taxes instead of income taxes, and had to raise them above those states with income taxes.
John Thacker: “Immigrants in Texas pay their fair share of taxes, by and large, and there isn’t so much grumbling about the state wasting money on people who don’t pay taxes.”
Do you live in Texas? Read Texas newspapers? Listen to what Texas politicians are saying? It’s a lot more than grumbling. Cities such as Farmer’s Branch and Irving have been targeting illegal immigrants with laws designed to make their lives very difficult. Politicians have been elected because they promised to end the extra education and health care spending caused by so many illegal immigrants.
oh and wtf does incentivize people to work mean ? i don’t want my tax dollars incentivizing Timothy Carl Klenke to work. Maybe what Mankiw means is incentivizing people to break windows and fixing them is better than and building a useless bridge.
This would just be another form of “rebate”, except it’s a couple levels up the pyramid. If governors have more flexibility than Washington to make good decisions about what it needs to be spent on, wouldn’t the people have even more? Why not let the taxpayers have all the cut rather than just handing it down to the next level of politicians.
Politicians don’t make economic decisions. They just make political decisions that have economic consequences.
A list of governors who would take less than 100% follows.
Those governors who think they have valuable infrastructure projects ready to go would take the money.
I love the way Mankiw just sort of *assumes* a rational, selfless governor. Let’s look at a couple of real governors whose situation I have at least a passing familiarity with: Schwarzenegger and Rendell. Do you *really* think that taking the money would, for them, be contingent on having a valuable infrastructure project ready to go? In what bizarre universe? Both of them will jump at the money so that they can try to plug the giant holes in their budgets, forget about infrastructure. And like the above commenter, I would assume that the other 48 governors will do much the same thing.
To dewey and bbartlog
States have safety nets during economic downturns. They also have basic services that they deliver that are public goods: police, fire, road maintenance, water filtration, courts, prisons, hospitals, etc. The public keeps these programs running, in part, because they are designed to provide services to the public.
Now is hardly the time to shut them down. You can argue about how efficient they are, if they could be privatized, etc. but using this difficult time to destroy them is just as silly as feeding them with Pelosi Pork.
Mankiw does not assume that governors are selfless. The economy needs a boost in employment, not infrastructure. For example a federal program to increase school construction might help in states with increasing population but not in areas that are shutting schools because of declining population. But if you throw money at the state, with strings attached, they will game the system to build new schools were they may not be needed. Western states might want to fund water resources, Coastal states flood control. Midwest states might give tax credit to employers. New England states might piss it away. The point is that governors must run for election in their respective states and will be held accountable for how they allocate scarce resources in their community. Is it perfect? No Is it better then broad federal mandates? Yes.
The proposal is for the federal government to grant every state executive the power to impose a tax without legislative approval, as long as it is this particular tax we designed 70 years ago to pay for old-age pensions?
That may be more Federalist than Anti-Federalist, in the Alexander Hamilton sense of the word, but it is certainly not what is called federalism.
Why just a fuel tax and not a full carbon tax? And why tie allowing States and cities to run “countercyclical” deficits to teh payroll tax. Teh payroll tax has no redemeing value. Be gone with it.
Let’s see if I understand this correctly. The best way out of this mess is to loot Social Security by grabbing payments and….pay it back later???? Yeah, that works. So far as the stimulus is concerned there is a detailed study (http://oraculations.blogspot.com/2009/02/you-will-most-likely-hate-reading-this.html> herewith links to deep stuff) that shows that stimulus to the poorest of us is the best way to jump start the economy. Why? Cause they’re busted and will have to spend it on needed stuff. In other words nearly 100% of the stimulus gets into the demand side of the economy instantly. The rest of us will save it, buy stock with it, retire credit card debt and so on meaning very little of it goes to the main street economy.
A payroll tax diversion may or may not be a good way to get money to states, but the idea that not every governor will take the money seems foolish. What is the argument for not taking it?
Voter sees money removed from paycheck. Governor has chance to keep that money in voter’s own state. Governor sends money to Washington. Come November, challenger says he won’t send part of your paycheck to dreaded Washington fat cats.
The opportunity for governor’s to keep payroll tax money is like increased leverage on Wall St. – once it was permitted it was required to stay competitive.
Doesn’t Iraq fall into the “broken windows fallacy?” We broke it for no reason other than to spend gobs of money fixing it.
I wonder what our economy over the past 7 years would look like if we had never invaded Iraq?
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