In light of the impending “fiscal cliff” I’d like to call your attention to three pieces of social science research that I find particularly important when discussing future spending, or lack thereof.
The first study, a working paper by the San Francisco Federal Reserve, found that the economic benefit of government infrastructure investment is particularly potent.
The study’s authors, Sylvain Leduc and Daniel Wilson, found “the effect of unexpected infrastructure grants on state GDPs (GSPs) since 1990 and found that, on average, each dollar of infrastructure spending increases the GSP by at least two dollars.”
As we approach the “fiscal cliff” we need to remember that spending on infrastructure and other economically beneficial programs might cost us now, but will make up that cost in the future.
As this paper shows, one dollar of spending today will yield at least two dollars of economic activity. That increased economic activity will result in increased taxes and fees and can, over the long run, end up bequeathing the government with more revenue than it paid in initially.
The second study I’d like to highlight looked at the benefits of tax cuts for the wealthiest Americans. Spoiler alert: they’re minimal.
The nonpartisan Congressional Research Service found that “cuts in the top marginal tax rate and top capital gains tax rate do not appear correlated with economic growth."
According to Yahoo Finance, “The report says cutting top tax rates don't appear to boost saving, investment or productivity, or the size of the economic pie, but do seem to increase disparities in income.”
Piggybacking on that study was another by the Federal Reserve that found that the 2003 capital gains and dividend tax cuts had minimal benefits for the stock market. The Center for Budget and Policy Priorities summarizes the study’s conclusion pointing to the fact that “European and U.S. stocks moved together, both after the announcement of the U.S. tax cut and after the tax cut itself… If the tax cut had boosted U.S. stocks, U.S. stocks should have performed better relative to European stocks, but they did not. As the Wall Street Journal stated, the study ‘concludes that the tax cut … was a dud when it came to boosting the stock market.’”
So, what to conclude from these three bits of information? It appears that President Obama’s position (that we need short-term spending and increase taxes on the wealthy, in addition to future spending cuts) is the correct one. We might even consider increasing the capital gains tax as an additional means of increasing revenue.
However, I don’t expect the studies to affect John Boehner and the Congressional Republican leadership’s dogmatic insistence that government spending and tax increases lead to economic catastrophe.
I do hope, however, that President Obama and Democrats in Congress will exhibit the backbone necessary to fight for the economic policies that research shows are the most effective.