In this mornings New York Times Bruce Bartlett published a nice list of anti recession measures by Congress and makes the point that they are always too late. However, if you read the list of 14 different measures he list you find that 12 of them are for public works programs and he is completely correct that they were too late to be effective anti recession measures. He is not saying anything new. It has been widely known for years that the time needed for Washington to act meant that using counter cyclical fiscal was very hard and it was usually too late. This has been standard main stream economics for years.

But two of the programs were tax cuts or tax rebates. One in 1975 and the other in 2001. Yes, he is right that the 1975 act came at the end of the recession, but the 2001 measure was very timely and the tax cut hit before the recession ended. I lived through the 1975 recession and remember clearly that the tax cuts played a major role in the 1975 consumer spending rebound.
Interestingly, Greenspan was the individual who convinced Ford to target the tax cuts to the middle class by pointing out that if President Ford wanted to buy a new car he would buy one and the tax cut would not make much difference. But for the typical middle class and/or poorer citizens liquidity constraints meant that the tax cut could make a significant difference in the car purchase decision. Moreover, as I pointed out yesterday the 2001 stimulus also clearly paid a significant role in the consumer spending rebound just as it did in 1975. The CBO just published a report where they found that one third of the 2001 tax rebate was spent in the first three months and two-thirds within 6 months.

Interestingly, the argument against tax cut being used by many bloggers is Milton Freedman’s
permanent income hypothesis. But even he recognized that this only applied to individuals that were not facing liquidity constraints — a very small segment of the population.

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