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Getting Stimulus Bang for the Budgetary Buck

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Chad Stone

Even if all the tax and spending changes scheduled around January 1 go into effect temporarily, the economy will not immediately plunge into recession. Policymakers will still have time, although not a lot, to adopt policies that would support the economic recovery in the short term while providing a framework for enacting meaningful deficit reduction over the longer term.

The best way to support the recovery is by extending policies that have high stimulus bang for the budgetary buck. Among the expiring income tax provisions, the 2009 expansions of the earned income and child tax credits primarily benefiting low-income households top the list, followed by the middle class Bush-era tax cuts. Policymakers might well extend them permanently in any “Grand Bargain” deal. The high-income Bush-era tax cuts, by contrast, lag far behind in cost-effectiveness.

Extending for another year the federal unemployment insurance benefits and the payroll tax cut (or enacting a temporary income tax cut tilted toward low- and moderate-income households, who will most likely spend any additional income they receive) would also provide a cost-effective and inherently temporary boost to the recovery.

For the longer-term, the Center on Budget estimates that it would take about $2 trillion of additional deficit reduction to stabilize the debt (relative to the size of the economy) by early in the next decade. Letting the high-income tax cuts expire would provide about half the needed savings and would have little effect on the recovery. Some combination of tax loophole closing and policy-based spending cuts would be far better for achieving the rest than the automatic across-the-board spending cuts that are now scheduled to go into effect.

Chad Stone is chief economist at the Center on Budget and Policy Priorities, where he specializes in the economic analysis of budget and policy issues. Stone is co-author, with Isabel Sawhill, of Economic Policy in the Reagan Years.

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