Media's Zandi Zeitgeist: Government Spending Trumps Tax Cuts

The media did it back in 2001 when President George W. Bush was fighting a recession. They’re doing it again today. Whenever the press discusses what government can do to jumpstart a failing economy, reporters often downplay tax cuts and praise government spending.

Now the media have found a favorite source to lend credibility to its pro-spending proclivities. Mark Zandi of Moody’s is frequently consulted by the press and cited by Democratic politicians for his “Bang for the Buck” chart in which Zandi advocates government spending over tax cuts.

Although a spending-heavy stimulus proposal has cleared the U.S. House of Representatives by a 244-188 margin and is expected to eventually pass in the U.S. Senate, the debate still rages over what should be done except in the news media. In those reports, government spending, or investment, has been given the edge.

If It’s Coming from a Former Republican Adviser, Now Helping Democrats, It Must Be Right


Zandi has become one of the darlings of this pro-Keynesian stimulative push by the left. Keynesian economics is the theory “that active government intervention in the marketplace and monetary policy is the best method of ensuring economic growth and stability,” according to Investopedia. Zandi’s ideas emphasize the government intervention and spending side, but downplay the monetary policy side of John Maynard Keynes’ economic model.

Zandi was an economic adviser to Republican Sen. John McCain’s failed presidential bid, but has an idea favored by congressional Democrats – so people on the left, including Speaker of the House Nancy Pelosi, D-Calif., are using his name for “bipartisan” cover.

“Well, in issues of this size, you really want as much legitimacy as possible, and sustainability,” Pelosi said on CNN’s Jan. 11 “Late Edition.” “You want to try to bring people together. And these investments are absolutely necessary. Economists from right to left, whether it’s Martin Feldstein, an adviser to President Reagan, Mark Zandi, economic adviser to John McCain, and all the way across the board, everyone says we need to have a recovery package. They also tell us that more jobs are created by investments, and especially Mark Zandi makes that point.”

Donna Brazile, an analyst for CNN and formerly an adviser to both Bill Clinton and Al Gore, also cited Zandi – although she misstated some of his numbers and embellished his title with the McCain campaign.

“You know, Mark Zandi, who was the chief economist and adviser to John McCain, said that, for every dollar in the stimulus, it will create $1.32 amount of GDP,” Brazile said on CNN’s Jan. 27 “The Situation Room.” “I don't know anything about the economy, but I know that it will give relief.”

The actual numbers Zandi uses are included in his “Fiscal Economic Bang for the Buck” chart on his Web site. With this document, Zandi makes the case for a one-year dollar change in real gross domestic product for a dollar given in federal tax revenue or increase in spending – where the Keynesian spending is shown to be more beneficial than the tax cuts.

His chart says temporary cuts can stimulate the economy $1.29 for every dollar spent. Permanent tax cuts are much less effective in his view – 30 to 48 cents of stimulation for every dollar spent.  However, the government spending increases are where Zandi says the effective stimulus comes from:


       Spending Increases


       Extending UI benefits                                                    1.64

       Temporary increase in food stamps                                1.73

       General aid to state governments                                   1.36

       Increased infrastructure spending                                   1.59


MSNBC’s Rachel Maddow, on her Jan. 28 show, also used Zandi’s data, but left out his name, and with that, his politics – and just referred to Moody’s.

“Well, Moody’s Investor Service looked into it,” Maddow said. “Moody’s doesn’t really play politics. They play money.”

She then cherry-picked the data for viewers, showing the worst-case for tax cuts and the best case for the increases in government spending.

“[T]hey say that every dollar spent on food stamps generates about $1.73 in economic activity,” Maddow said. “Every dollar spent on infrastructure about $1.59 on economic activity. Tax cuts, which Republicans are ideologically committed to, they can have a stimulative effect on the economy but not nearly as much, about $1.03. When you start talking corporate tax cuts specifically, you are down into negative territory. Every buck you spent to do that stimulates the economy about 30 cents.”

It’s worth noting that Maddow and others who agree with her are willing to trust the economic arm of Moody’s –, but the media often cite some reports suggesting Moody’s failure to accurately rate debt was the impetus for the subprime crisis that led to this recent economic downturn.

Though Zandi likely played no role in the debt-rating arm of Moody’s, it’s still interesting that Moody’s is still being considered an authority.

Zandi the ‘Go-To Guy’ and his Critics


A Feb. 3 Washington Post article noted that Zandi has become the “go-to” guy for the stimulus, and for a lot of the aforementioned reasons, it’s correct.

That story by Shailagh Murray acknowledged that Zandi has a lot of supporters on the left and that they in fact associated him with Republicans and conservative economic theories.

“But his political pedigree has set him apart,” Murray wrote. “Zandi is often grouped with Martin Feldstein, President Ronald Reagan's chief economist and another early advocate of a robust stimulus bill, to validate the package's crossover appeal.”

However, that’s not exactly the case. Although Zandi participated in the political process as an adviser to the McCain campaign, that didn’t mean he is a Republican. In fact, he’s not.

“Zandi is not exactly a convert to the cause,” Murray wrote. “‘I’m a registered Democrat,’ he acknowledged. He signed up with McCain when Douglas Holtz-Eakin, the candidate's chief economic aide and a longtime friend, asked him to join the campaign's diverse economic advisory team. ‘My policy is I will help any policymaker who asks, whether they be a Republican or a Democrat,’ Zandi said. He declined to say whether he voted for McCain or Barack Obama in November. ‘My wife would also like to know the answer to that question,’ he noted. Asked this week about his relationship with Zandi, McCain deflected with a clipped ‘I had many advisers.’”

Business & Media Institute adviser Dan Mitchell had doubts about Zandi’s “Bang for the Buck” calculations, suggesting they have never been tested in real-time environment.

“Someone should ask him to show real-time evidence of his model predicting the current downturn (or the preceding expansion, or the downturn before that, etc),” Mitchell said.

As for Zandi’s politics, Mitchell suggested that may have had something to do with the November outcome – which might not be that far-fetched considering Holtz-Eakin admitted after the election that he had miscalculated by advising McCain to support the TARP bailout package.

“Why McCain was being advised by someone like that is a mystery, but maybe that's why he ran such a terrible campaign,” Mitchell added.

Tax Cuts vs. Spending

Media reports have gone forward with Zandi’s theory that government spending – in whatever way – is better for the economy than supply-side tax cuts.

Betsy Stark of ABC provided an example of a journalist publicly hoping policymakers would focus on government-spending stimulus instead of tax cuts. She told anchor Charles Gibson on ABC’s “World News” Jan. 26 that it was a given that government-spending programs would help the economy more in the long-run, citing what she called a “rule of thumb.”

“[I]n an economic crisis like this one you probably need to do both,” Stark said. “But President Obama wants to devote a larger share of it to spending programs. And he justified that today with this rule of thumb generally accepted by economists: Every dollar of spending produces $1.50 in stimulus, every dollar in tax cuts produce – produces 75 cents in stimulus.”

Stark did not offer a source for that statistic in her report, nor did she respond to inquiries from the Business & Media Institute on how she came up with the “rule of thumb.” However, she did argue the case for her stats in the ABC segment.

“And the logic is a dollar devoted to a spending program produces jobs which produces income, which produces new spending,” Stark continued. “A dollar devoted to a tax cut could be spent but it could also saved. So, bigger bang for the buck with a spending program, but it takes longer to get into the economy.”

Contrary to Stark, Melissa Lee of CNBC argued on behalf of tax cuts Jan 31. Lee said a tax cut would stimulate the economy faster than government spending. And, with the economy in such dire shape, she insisted this was the best means necessary.

“The bleak economic outlook is strengthening the case for swift action on a stimulus plan, action that couldn’t come soon enough for job seekers like these across the country,” Lee said on NBC’s Jan. 31 “Nightly News with Lester Holt.” “Many economists now say there is a stronger case, or a heavier emphasis on tax cuts vs. spending in the stimulus plan. Tax cuts, because they may have a more immediate impact on consumers and businesses.”

Lee didn’t define what she meant by a tax cut. Some free-market economists fear that the Obama administration’s definition of a tax cut could really be tax credits to people that do not pay taxes – and argue that would be better described as income redistribution.

Thomas Sowell pointed out on Fox News Channel’s “Hannity & Colmes” Jan. 5 that the tax cuts included in Obama’s plan aren’t actually tax cuts. “[S]ometimes you’re giving tax cuts to people who don’t pay any taxes. And that’s not giving them back their money. That’s simply handing out welfare,” Sowell said.

Voice Not Heard – Why the “Bang for the Buck” Multiplier Effect is Fuzzy Math


Steve Forbes appeared on NBC’s Feb. 1 “Meet the Press” and cited all the failed stimulative efforts of Japan throughout the 1990s as evidence that government spending programs don’t work.

Forbes isn’t the only detractor of the stimulative effect of government spending. But the networks have included few critics who could dispute the idea that government spending will boost the economy.

However, Alan Reynolds, a senior fellow at the Cato Institute, explains why these multiplier theories (like Zandi’s Bang for the Buck concept), if implemented, could produce more harm than good.

“The C+I+G (consumer spending + investment + government spending) rubric [for determining GDP] is a tautology — true by definition,” Reynolds wrote in the Feb. 9 issue of National Review. “Yet it seduces people into confusing the uses of income (spending) with the sources of income (production). One person’s spending is another person’s income, but that does not mean the mere act of spending money creates real income. If that were true, then every poor country could become rich by simply dropping money from helicopters.”

And though government, or “G,” is a component of GDP, a disproportionate size of government can interfere with the resources the private sector needs, which is where real economic growth occurs according to Reynolds.

“I sometimes joke about having had trouble with Keynesian accounting in school — because I always wanted to subtract G,” Reynolds continued. “It’s not just a joke. Government purchases of real resources absorb labor, land, equipment, and materials, and thereby raise the cost of production for private businesses, damaging the profitability of private investment. Government transfer payments are a disincentive for those who receive the benefits and for the taxpayers who pay.”