There’s an old adage: you can fool some of the people some of the time, but economists are foolish people most of the time.
Economists at Deutsche Bank prompted us to recall this bit of wisdom today when they raised their projections for GDP growth next year from 3.3 percent to 4.1 percent. Their reason for the raise was that the tax deal agreed in Washington, DC last night promises a payroll tax holiday. Their basic reasoning seems straight forward enough—if you increase the amount of money that shows up in the paychecks of workers, they’ll go out and spend most of that money, which will help the economy grow.
Unfortunately, it’s not so simple. In fact, temporary tax relief tends not to increase consumer spending by very much. What’s more, tax relief that comes in the form of a temporary payroll tax cut is even less likely to stimulate spending.
But first let’s give the Deutsche Bankers their due. As you’ll see, they have lots of math on their side.