Is the Bush Tax Cut Extension Stimulus in Disguise?

Mark Zandi, Chief Economist at Moody’s, thinks that the Bush tax cut extension is stimulus in disguise:

“It’s stimulus in the sense we’re providing some additional temporary tax cuts and some additional temporary spending increases, so I’m not sure what the difference is between what we’re talking about here and what we did back in early ’09,” Zandi said on America’s Election Headquarters Sunday.

I’ve been asking myself the same question the last few days.  The problem I have is that the plan only calls for a two-year extension of the Bush tax cuts.  Yet, one of the major headwinds on the recovery has been the pending expiration of the Bush tax cuts.  Moving the deadline out by 2 years doesn’t remove the uncertainty.  Individuals and businesses still have to wonder if they tax cuts will be extended, yet again, or allowed to expire.  Temporary tax relief is short-term stimulus . . . the economy needed them to be made permanent.

However, another way to look at the extension is that it is really a deferral of a planned tax increase.  The expiration of the Bush tax cuts  was, on the flip side, a trigger for higher taxes.  It still doesn’t help the uncertainty problem, but the absence of a negative is a positive.

So I think Zandi is right and wrong.  He’s right in that not making the Bush tax cuts permanent (along with all the new provisions) in effect reduces the economic impact of the  extension into Obama Stimulus Part Deux–with the same lackluster results.  However, he’s wrong in that no action would have triggered one of the largest tax increases in U.S. history–thus avoiding a certain policy-induced double-dip recession.

In the end, thanks to muddled U.S. policy, the economy will also continue to muddle its way forward.  While we lost an opportunity to reduce the odds of a double-dip recession (by permanently extending the Bush tax cuts); looking on the bright side, we’ve at least removed this option as the cause for a possible double-dip recession.