Monday, January 5, 2009

$700 Billion Stimulus Plan To Include $300 Billion In Tax Cuts

Is Obama relying too much on tax cuts?

I don’t know yet. But news reports this morning certainly raise questions.

Let’s lay out the basics here. Other things equal, public investment is a much better way to provide economic stimulus than tax cuts, for two reasons. First, if the government spends money, that money is spent, helping support demand, whereas tax cuts may be largely saved. So public investment offers more bang for the buck. Second, public investment leaves something of value behind when the stimulus is over.

That said, there’s a problem with a public-investment-only stimulus plan, namely timing. We need stimulus fast, and there’s a limited supply of “shovel-ready” projects that can be started soon enough to deliver an economic boost any time soon. You can bulk up stimulus through other forms of spending, mainly aid to Americans in distress — unemployment benefits, food stamps, etc.. And you can also provide aid to state and local governments so that they don’t have to cut spending — avoiding anti-stimulus is a fast way to achieve net stimulus. But everything I’ve heard says that even with all these things it’s hard to come up with enough spending to provide all the aid the economy needs in 2009.

What this says is that there’s a reasonable economic case for including a significant amount of tax cuts in the package, mainly in year one.

But the numbers being reported — 40 percent of the whole, two-year plan — sound high. And all the news reports say that the high tax-cut share is intended to assuage Republicans; what this presumably means is that this was the message the off-the-record Obamanauts were told to convey.

And that’s bad news.

Look, Republicans are not going to come on board. Make 40% of the package tax cuts, they’ll demand 100%. Then they’ll start the thing about how you can’t cut taxes on people who don’t pay taxes (with only income taxes counting, of course) and demand that the plan focus on the affluent. Then they’ll demand cuts in corporate taxes. And Mitch McConnell is already saying that state and local governments should get loans, not aid — which would undermine that part of the plan, too.

OK, maybe this is just a head fake from the Obama people — they think they can win the PR battle by making bipartisan noises, then accusing the GOP of being obstructionist. But I’m really worried that they’re sending off signals of weakness right from the beginning, and that they’re just going to embolden the opposition.

Like Barney Frank, I’m feeling a bit of post-partisan depression.

And from his readers:

Dr. Krugman:
I’ve been a lurker/reader/fan for a long while, but please allow me to interject my $0.02 here. By way of background, I’ve been practicing law in Michigan for 35+ years, mostly public service, but for the last 7 in private practice. Also, I have been a practicing political campaigner for about the same time.

In my opinion, the Obamiacs are aiming to pick off the 2-3 votes they need for cloture in the Senate with this amount of proposed tax cut. I share your concern that they Repubs will demand more and more, however, they don’t need or expect or even want Mitch’s vote. A week or so of debate and detail, then get it done. The leadeship’s game now is to damp expectations of swift passage and then deliver it before the end of the month, with as little Repub help as possible. This help sets up 2010 for a gain of 2-3 in the Senate with all that implies for 2012..

— Paul Bricker

I share your concern, Paul. But I’m not yet ready to lump all Republicans in the McConnell-Boehner camp. Yes the GOP is more hard-core than ever, but there are still enough moderates, such as Maine’s two Senators and Arlen Specter (PA), who are rational enough to join Obama and the Democrats under reasonable conditions. And don’t forget that many Democrats may also need some “tax cut cover” before signing on to a big spending package.

Still, I expect that we will have to be ready to take to the phones, e-mails, and even the streets to make it clear to Congress that the Free Market Feeding Frenzy is over for good. We will have to bombard all of our representatives with the message that bigger is better for stimulus, it’s time for national health insurance, and no more Wall Street bailouts before we gets serious oversight and transparency.

Obama also has to get tough from the start about how we need to move from our culture of “me, myself, I”, which is at the heart of the GOP’s success these past three decades, to balancing our personal and national interests. He will have to use the same cool, rational, clear style that served him so well in defeating McCain to defeat the hysteria that the GOP will try to foment once he takes office. He needs to make it clear that the GOP now represents the super-wealthy who will lead the world into fascism–perhaps even feudalism–before paying their fair share.

— David Lentini

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