Let’s suppose we need some form of fiscal stimulus — I’m not sold on this, but I consider it plausible. The next question is what form should the stimulus take. To be effective, the stimulus needs to be mind-boggling expensive. We’re talking hundreds of billions of dollars, possibly over a trillion, in deficit spending.
As Dave Price pointed out in the last thread, bad stimulus can be worse than no stimulus. Hire millions of people to dig a giant hole and fill it back up again, and you’re reducing the real size of the economy by taking millions of people out of real productive jobs and moving them to phoney-baloney stimulus jobs, wasting their time and effort and wasting the supplies and equipment used up in the process.
Obama’s proposed stimulus package is to fund hundreds of billions of dollars worth of infrastructure projects. Without yet knowing the details, this could be a good idea or a very bad idea. If the infrastructure projects are worth the costs on their own merits and are within the legitimate domain of the federal government, then it’s a useful stimulus package. But it’s unlikely we can get a large enough stimulus package by funding only worthy projects. In order to run the numbers up, it’s likely that a very low standard of scrutiny will be applied and we’ll wind up funding something like $100 billion worth of worthwhile projects and $700 billion worth of bridges to nowhere and empty commuter trains. If we do decide to make infrastructure projects part of a stimulus package, I’d strongly suggest limiting it to accellerating projects which have already been reviewed and decided to be worthy of funding.
Dave Schuler has some more thoughts on Obama’s proposed stimulus, as do Reason’s Adrian Moore and Sam Staley.
Another stimulus proposal that I’ve seem floated various places is a temporary reduction or elimination of the payroll tax (presumably funding Social Security and Medicare out of general revenues in the meantime). Broad-based tax relief offers two major advantages over infrastructure projects. The first is that the only jobs it funds are jobs that are deemed worthwhile on their own merits, mostly private sector jobs. The second is that it stimulates every sector of the economy, not just construction.
This stimulus would come in two parts. The employee contribution would be added back to your paycheck (7.65% of income if you’re making less than $106k/year), helping to pay the bills and pay down debt. But more importantly from a stimulus perspective, your employer will no longer be taxed an additional 7.65% of your salary for the privilege of employing you. Employers lay off employees in recessions in order to save payroll costs. Waive their portion of the payroll tax, and they save 7.65% without laying off a single worker. Cutting the employer share of the payroll tax has been used succesfully in Singapore.
More on this option from Greg Mankiw and from John Makin.
The cost will be devastating, though — $950 billion in 2009 to rescind the whole payroll tax, but that’s what you signed up for when you asked for fiscal stimulus. A couple hundred billion dollars in additional deficit doesn’t do much to stimulate a $14 trillion economy.
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A key problem with the federal spending/build infrastructure (defined as roads and bridges) approach to fiscal stimulus is that it’s a political minefield. It provides jobs for men at the expense of women, workers in the construction trades at the expense of service workers, etc. As I’ve said in my posts on the subject, I think it’s too reliant on a dated image of the economy.
But I’m also not sure how to cope with structural unemployment in a service economy. This is really new territory.
I’m not certain I agree with you there, Dave. Construction requires a wide range of supporting services, which is why it is often leaned upon in situations such as this. That dependence on supporting services has grown in the modern era as construction companies leaned out and outsourced or sub-contracted jobs formerly done in-house, just like everyone else.
I still prefer a plan that puts money in everyone’s pocket over an extended period via suspension of the payroll tax. Take the monetary pressure off both workers AND employers makes more sense to me.
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