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Is Saving Your Tax Cut Such A Bad Thing?

Business Week's Michael Mandel makes a great point:

The conventional economic wisdom these days seems to be that tax cuts or tax credits are bad because people save the money, rather than spending it. ...

But this conventional argument misses the whole point. Consumers have a massive hole in their balance sheets these days. Home prices are plunging, incomes are slowing, and many families have huge debts. Americans are staggering.

From this perspective, the main purpose of the tax cuts and tax credits is to help repair consumer balance sheets, just like the TARP is helping repair bank balance sheets. I don’t want consumers to spend the tax cuts—I want them to save the money, as much as possible, and get their debt back to reasonable levels. That’s the only to ensure that consumers will be on solid ground when the recession is finally over. ...

[T]he three prongs of the stimulus package serve distinctly different purposes. The TARP recapitalizes the banks, with $700 billion. The tax cut, at $300 billion, recapitalizes the consumer. And the government spending program—say, $500 billion—provides the missing demand and jobs.

I think there's a lot of truth to that. My lone quibble is that government spending can accomplish both things--recapitalization and goosing demand--by creating jobs and higher incomes, some of which people will save, some of which they'll spend. But I don't think Mandel would disagree. And it's not crazy to want some of the recapitalization to happen soon. It's often a precondition for consumers to spend again.

You hear a lot of talk about how saving is a bad thing. And it is in the narrow confines of a stimulus conversation. But if people are so quick to save any money they stumble across, it's often because they're dug in under a lot of debt. Which means digging them out should be a priority, too.

(Via RCP.)

--Noam Scheiber