TaxVox What Should Obama’s Stimulus Look Like?
Howard Gleckman
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Barack Obama has set quite a goal for himself: He wants a fiscal stimulus that will both boost today's economy and lay the groundwork for "long-term sustained… growth."

Doing both will not be easy. In fact, it may not be possible. So which is more important?

The conventional wisdom is that jumpstarting growth should take precedence. Faced with a diagnosis of a classic liquidity trap, the cure is simple: Throw money at it. If it doesn't work, throw more money at it. Sooner or later, drowning in cash, lenders will start parceling out the dough. At the same time, the lesson from Keynes seems equally straight forward: If consumers won't buy, government should. Infrastructure, technology, health care, payments to the unemployed, help for state and local governments. Whatever. Finally, use new tax cuts to put extra cash in people's pockets, money they will eventually spend.

But will it work? Some elements will, for sure. But much of this stimulus may become the fiscal equivalent of spreading manure on a frozen December farm field. It will be little more than worthless runoff.

Stanford economist John Taylor has a different idea. He argues in today's Wall Street Journal that fiscal policy should be "permanent, pervasive, and predictable" To Taylor,that means extending the Bush tax cuts for all, which clearly is not going to happen. But his broader point is worth thinking about. Btw, for a more amusing look at this, take a look at Greg Mankiw's blog.

As Obama seems to recognize, spending for its own sake is not smart. His announcement today that former TPC co-director Peter Orszag will be his new OMB chief was coupled with Obama's call for Peter to scrub the entire budget for wasteful spending. There is the stale whiff here of Ronald Reagan's never-ending search for "waste, fraud and abuse," but in the face of staggering deficits, it is at least a start.

When it comes to taxes, Obama will certainly try to extend all of the Bush tax cuts for the middle class. But many of those provisions, such as cutting taxes for married couples, to say nothing of Obama's campaign vow to cut taxes for seniors, would provide neither stimulus nor long-term growth. Obama should let these ideas die a quiet death.

Similarly, Taylor is right that temporary tax cuts accomplish little in either the long- or short-term. The other problem: Except for rebates, no tax cuts are temporary anymore. No matter how dubious the benefit, Congress will make these changes immortal.

Finally, I understand that nobody wants to hear about deficits in the midst of an economic slump. But nearly all credible economists will tell you that even in the medium-term tax cuts can't enhance growth if they produce bigger deficits. Washington is borrowing hundreds and hundreds of billions of dollars to get the economy back on track and, like it or not, sooner or later all that money is going to have to be repaid. That is worth remembering as Obama starts to write what is likely to be the mother of all stimulus plans.

Primary topic Federal Budget and Economy
Research Area Federal Budget and Economy Individual Taxes Campaigns, Proposals, and Reforms