Too Much To Spend

Obama advisors, recognizing the concern with driving 40% of the recovery package into tax cuts, are responding by claiming that the problem is finding the projects to spend on that will stimulate the economy, forcing tax cuts into the mix.

The spending versus taxes distinction is the wrong way to think about it. The question is at the margin. So one dollar of infrastructure is better than one dollar of tax cuts. But if you already have a hundred dollars of infrastructure then adding one dollar of infrastructure is a lot less effective than adding one dollar of tax cuts.

This adviser also emphasized the plight Obama's team faced in crafting a stimulus, one I had noted (again, echoing the likes of Paul Krugman). Spending more than a few hundred billion dollars of government money actually isn't that easy, assuming you're determined to do it in ways that will quickly stimulate economic activity.

I guess they're thinking that there aren't enough "shovel-ready" projects out there, and if you want to spend money that'll be circulated into the greater economy, long-term projects have less significance. And so, by offering tax cuts through reducing withholding, they're attempting to create tax cuts that will look like wage increases, which do tend to stimulate economic activity.

I respect that as far as it goes. However, infrastructure spending is kind of an inherently long-term thing, and now is the time to get as much planning out the door as well as the shovel-ready projects. If the end result is that infrastructure goes to the back of the line again with the most vital band-aids attached but without moving forward on transit, a smart electric grid, universal broadband, etc., then we've missed a big opportunity.

Furthermore, money for these tax cuts really does crowd out other spending, be it infrastructure or otherwise, and even mimicking tax cuts as wage increases won't solve the basic fact that the stimulus will end up too small to work. Plus, the tax cuts that DON'T mimick wage increases may produce no net impact on the economy. Read Krugman's entire post for the numbers, but here's the conclusion.

This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

Why 80 votes makes any sense whatsoever is stunning to me. If the Obama team thinks they can spread the pain in the event that the economy doesn't come back in the next two years, they're crazy. Nobody will remember how many people voted for the stimulus, whether it's 51 or 99. They'll remember that the party in power failed to achieve. And letting the GOP help design the bill ensures that this proposal is the STARTING POINT. Clearly Republicans will ask for more tax cuts and less stimulus spending. That's their mantra. Tax cuts in a downturn, tax cuts when the economy is healthy, tax cuts, tax cuts, tax cuts. It's irresponsible and wrong, and extremely damaging to progressive interests. Eventually Obama's team will find themselves unable to meet campaign promises because they won't have the revenue. The worst part of this is the default conservative position that tax cuts are a universal good.

UPDATE: Eliot Spitzer thinks we should fund robots that will take over the world and enslave us. Thanks a lot, Eliot! Actually, his essay has some good points.