Paul Krugman again (Spending versus tax cuts):
Jeff Frankel says what I wanted to say about what we know so far about the impact of the stimulus:
Martin Feldstein and others predicted that the tax-cut component of the 2009 fiscal stimulus package would have substantially less expansionary bang-for-the-buck than the spending component of the package, because much of the tax cut would be saved, as had been the case with the 2008 tax cut. (“Bang for the buck” in this case could be defined as demand stimulus divided by budget cost.) We knew this from Milton Friedman’s permanent income hypothesis, or even from good old Keynesian multiplier theory...
And sure enough, that’s what’s happening.
It’s worth emphasizing this point, because there’s been a lot of nonsense written about the issue. Take this conspiracy theorizing from Clive Crook:
Politics more than economics guided the design of the first stimulus, after all. Democrats preferred public spending because they wanted to widen government’s role and repudiate the Republicans’ instinct to cut taxes regardless of the circumstances...
Um, no. Democrats preferred spending because they feared, based on quite standard economics, that tax cuts would be ineffective. And so they have proved.
A little thought will demonstrate why. One way to look at the purpose of a government deficit-spending-program-as-stimulus is that its entire purpose is to create a wedge between investment spending and net savings. The government's borrowing subtracts from net savings, but what does it then do with the money it borrows? It needs to return it to the economy in a way that doesn't push up private savings--and government spending on goods that private individuals would not otherwise buy is the best way to do that.
It's not that politics more than economics guided the design. It's much more that economics and the politics of the Democratic coalition ran in harness. Where politics guided the design was in the tax-heavy stimulus packages of the Bush administration pushed by economists like Hubbard and Mankiw--and I haven't seen anything that makes me think they were very effective.