“What’s in a name? That which we call a rose
By any other name would smell as sweet.” – Juliet (from Romeo and Juliet)
During the fall we had repeated (here, here, and here) calls for additional “stimulus” spending. Experts even attempted to quantify how much was needed, as if economy were that easily controlled and manipulated.
Arguments for additional direct spending were tired and worn. The American people were in no mood for more spending (witness the election results). It was on to new arguments and distractions.
Economists have long argued about the most effective way to use government spending to influence aggregate demand (which is what stimulus is). In Capitalism and Freedom, Milton Friedman took the position that if the government is going to “spend” to prime the economy the most effective way to do it was tax cuts – especially cuts to the payroll tax which gives people a sense that their pay has gone up.
So we got the tax cut compromise; a combination of temporary tax cut extensions, a one year cut in payroll taxes, additional unemployment benefits, new business tax credits, and some additional spending.
The expiring tax cuts were the perfect vehicle to enact such a stimulus . . . without ever using the word. Kabuki theater ensued. Both sides put on their make-up and costumes, made their respective standard playbook arguments, emoted, gnashed teeth, enacted the bill, and quietly moved on to mutual back-slapping.
We can debate whether it was a good idea. I, for one, am skeptical. But we should not be misled by its name. The “Tax Cut Compromise” was stimulus package 4.