The problem with the current stimulus plan is not that it is too big but that it delivers too little extra employment and income for such a large fiscal deficit. It is worth taking the time to get it right.
Getting the most bang for the buck has been a theme of Keynesians on the left so I find it hard to disagree with Feldstein’s overall objective even if I differ with him on some of the details such as:
Instead, the tax changes should focus on providing incentives to households and businesses to increase current spending. Why not a temporary refundable tax credit to households that purchase cars or other major consumer durables, analogous to the investment tax credit for businesses? Or a temporary tax credit for home improvements? ... The largest proposed outlays amount to just writing unrestricted checks to state governments. Nearly $100 billion would result from increasing the "Medicaid matching rate," a technique for reducing states' Medicaid costs to free up state money for spending on anything governors and state legislators want. An additional $80 billion would be given out for "state fiscal relief." ... If rapid spending on things that need to be done is a criterion of choice, the plan should include higher defense outlays, including replacing and repairing supplies and equipment, needed after five years of fighting.
Fortunately, I don’t see a lot of push from those with any leverage to greatly increase DoD spending. There are proposals to give tax breaks for homeowners and car buyers, but I’m not sure if those will get very far either. But Steve Benen is reporting on what might be the ultimate Senate deal with this (draw mainly from some excellent reporting from the gang at Talking Points Memo):
it's not at all clear what kind of concessions were necessary to cross the 60-vote threshold. TPM, for example, obtained a staff paper circulated today with nearly $78 billion in cuts, with a lot less money for states, healthcare, and education. Did the Democratic leadership sign off on these cuts? (Maybe.)
Some of us have argued for more Federal revenue sharing but Feldstein said this was not a good idea and the Senate may go along. The states have balanced budget restrictions so they may have to cut spending, which is Hoover economics – right? Feldstein counters with:
Will these vast sums actually lead to additional spending, or will they merely finance state transfer payments or relieve state governments of the need for temporary tax hikes or bond issues?
I guess the states could raise taxes. Given that state and local taxation tends to be less progressive than Federal taxation, we’d see the partial realization of the goal of some conservatives – shifting the tax burden from the rich to the working poor. Not only does this go against what most progressives would see as good policy, it might also be bad macroeconomics if those facing the tax increases are borrowing constrained. In other words, even temporary tax increases on such households could reduce consumption. No, I don’t agree with the details of the Feldstein op-ed even if the Senate moderates seem to be falling in line. Ahem!
Then again – we can be thankful that the Senate moderates are not taking the advice of Jeffrey Miron.