Monday, February 2, 2009

Stimulus package

I have not written about the stimulus package here because I have not been following it in detail. My sense is that I agree with Alice Rivlin of the Brookings Institution, who is also President Clinton's former budget director, that it would be better to move quickly on the actual stimulus part of the stimulus bill while leaving the other parts to be dealt with more thoughtfully. In things like health care reform initial choices matter a lot. For example, the truly wretched design of the Medicare prescription drug plan passed under Bush II will be with us for a long time. Social security, another poorly designed program, has proven impossible to reform other than minor tinkering at the margins. Rivlin's views, and some other interesting thoughts, appear in this WaPo article.

I am heartened, also, to read about Larry Summers pushing for spending that will happen now. Whatever your views on the value of a stimulus package in the larger sense, all economists agree that a necessary condition for the package to have any value is for the spending to happen fast. There is also pretty general agreement that this has not been a characteristic of past spending packages in similar circumstances, where the bulk of the spending would typically arrive once a recovery was already underway. Larry is right on target here, even if the spending in the bill is often not.

This article also illustrates a general complaint of mine, which is the description of the package as containing tax cuts. It contains no such thing. By increasing spending, the package increases the discounted expected value of future tax payments. What the package does is to redistribute tax collection over time, by borrowing now to finance current expenditures while cutting current tax rates. It also redistributes the expected tax burden across individuals by changing the rates of certain types of taxes but not others in the short run. To actually cut discounted expected future taxes you have to cut spending, and that is certainly not what this bill is about. The press could do everyone a favor, and fulfill the lofty role that it imagines itself as filling, by adopting language that made this clear, rather than doing what they currently do, which is using misleading language about tax cuts.