The Obama transition team, soon to be the Obama administration, is concocting a reenactment of the New Deal.
A trillion dollar stimulus is going to “create” jobs, and the government will “bailout” failing industries (with additional debt funded by the Chinese, so long as they have an appetite for quickly depreciating dollars). If you think this sounds half-baked and suffers from historical amnesia, you are right.
Despite the obvious shortcomings with this approach (e.g., it’s never worked before), the Republican Party so far isn’t doing a very good job of coming up with alternatives. Plainly, they don’t like the mounds of debt. And they are skeptical of a gigantic public works projects. But what could be done instead?
There are some viable ideas, although they don’t do much for the liberal allies and Big Labor patrons of the new administration.
Lawrence Lindsay writes that tax cuts rather than government spending will have a more immediate and long-lasting impact on the economy:
The relative advantage of tax cuts over spending is even clearer when the recession is centered on the household balance sheet. Some relatively minor changes, like making the current 15 percent tax rate on dividends and capital gains permanent, would not only help household cash flow, but also put a floor under equity prices much as their introduction did in 2003. This would help protect against further wealth destruction and balance sheet deterioration.
[T]he centerpiece of any tax cut should be employment taxes: in particular, a permanent halving of the current 12.4 percent Social Security payroll tax on the first $106,800 of wages, split evenly between workers and employers. The direct revenue effect of that would be a bit under $400 billion per year, roughly in line with the present quantitative needs of the economy. It also meets our three tests of effective stimulus.
First, the funds would flow directly to households through higher take-home pay and indirectly through a reduction in the cost of employment. Economic studies conclude that the benefits of a reduction in the employer portion of the payroll tax are ultimately received by employees. But the immediate effect would be an improvement in the cash flow of credit-starved businesses (as well as being a marginal incentive to keep employment up).
Second, the funds would be extremely timely, with the benefits hitting the economy with the first paycheck after the plan was implemented.