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Out With Fact, In With Faith: How Ideology Keeps the Economy Down

David Callahan

It’s a cruel fact for millions of unemployed Americans that the jobs plan President Obama unveiled last night will never be fully enacted by Congress. What’s even crueler, though, is that the least effective elements of the plan have the best chance of passage. New direct federal spending, the most powerful form of stimulus, is widely considered DOA on Capitol Hill – while weaker tax cut options will get a real hearing.

That’s not how things would go if mainstream economists were calling the shots. Economics is not an exact science, but economists do have pretty good models to predict what “fiscal policy multipliers” will be most effective at stimulating growth and new hiring. Just last month, for example, the chief economist for Moody’s Analytics Mark Zandi released an analysis of stimulus measures work. Zandi advised John McCain in 2008 and is anything but a committed liberal. But his study, supported by the full weight of Moody’s modeling expertise, clearly shows that spending is the best form of stimulus.

The single most effective form of stimulus, the study found, are increased outlays for food stamps — which create $1.71 in economic activity for each dollar in federal spending. The other top two boosters are spending on unemployment benefits and infrastructure. Earlier studies, including by the Congressional Budget Office, have found largely the same thing.

Now, in case you didn’t notice, President Obama did not stand up last night and call for massive new spending on food stamps. While he did call for new infrastructure investments and again extending unemployment insurance, these were not the largest elements of his plan. Instead, the biggest ticket item by far – estimated to cost $244 billion – is an expanded payroll tax holiday for both workers and employers.

The only reason Obama is putting so many eggs in this basket is that a payroll tax cut is said to have a fighting chance in Congress, given that Republicans backed a holiday last year. But make no mistake: the appeal here is political, not analytical.

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