Getting the Biggest Bang for the Buck

Which kind of fiscal stimulus provides the biggest bang for the buck?
Last month, Mark Zandi, chief economist at Moody's Economy.com, gave the Senate Budget Committee detailed testimony on the comparative impact, or multiplier effect, of spending increase and tax cuts. New York Times economics writer Louis Uchitelle has the rundown on Zandi's testimony:

Mr. Zandi, who advised the Republican presidential candidate, John McCain, said in testimony last month before the Senate Budget Committee that nearly every dollar spent in this fashion generates $1.50 or more in economic activity. Repairing a road, for example, means hiring workers who spend their new salaries at supermarkets, which in turn hire more store clerks and stock more groceries to handle the extra spending.

He advised McCain? So what does he have to say about tax cuts?

This “multiplier effect” is missing, however, when the stimulus comes as a tax break. A $750 billion stimulus package devoted entirely to spending could achieve, through the multiplier effect, more than the $1 trillion rise in output that the Obama administration apparently seeks to generate the 2.5 million new jobs.

Zandi defines the "bang for the buck" as the "one year $ change in GDP for a given $ reduction in federal tax revenue or increase in spending."
Zandi make a succinct case for federal assistance for strained state budgets:

Because most state governments are required by their constitutions to quickly eliminate their deficits, most have drawn down their reserve funds and have already begun to cut programs ranging from healthcare to education. Cuts in state and local government outlays are sure to be a substantial drag on the economy in 2009 and 2010. Additional federal aid to state governments will fund existing payrolls and programs, providing a relatively quick economic boost. States that receive checks from the federal government will quickly pass the money on to workers, vendors and program beneficiaries.

Governors and governors-elect meeting with Barack Obama tomorrow are hoping that the new president will take Zandi's recommendations to heart.