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Economic Stimulus Done Right

This must be Keynes’s year:

President-elect Barack Obama’s economic team is crafting a stimulus package to send to Congress worth between $675 billion and $775 billion over two years … The transition team has conveyed the figures to Capitol Hill, where the package is likely to grow as it works its way through the House and Senate. An Obama adviser familiar with the planning said the package could top out around $850 billion.

[The plan] will include a tax cut designed to pump $50 billion to $100 billion into the economy almost immediately; around $100 billion in aid to state governments, primarily to temporarily assume more of the cost of Medicaid, in hopes of staving off benefit cuts or tax increases; and funding in five main areas: traditional infrastructure, school construction, energy efficiency, broadband access and health-information technology.

As if the $700 billion financial-bailout package weren’t already hard to swallow, now a stimulus measure at least as plump is right around the corner. Compounded by the Federal Reserve’s monetary incontinence in the face of financial crisis, all of this adds up to quite a bit of “stimulus.”

If the new administration is seeking maximal stimulant bang for the $850 billion bucks likely to be pledged and is willing to expand the deficit by an equal amount, freezing taxes by the full extent of the stimulus package would be the way to go. Such an implicit fiscal measure would allow the gains to be distributed efficiently wherever the dynamics of supply and demand dictate.

None of this deficit-financed stimulus budget would be wasted on government projects delivering no economic gains, or vanished into leaky bureaucratic channels, or decimated by the prohibitive administrative costs associated with distributing funds. Government spending is about as stimulating to a bruised economy as putting people to work digging holes and filling them up again would be. Yes, that too has been done before, by none other than FDR in comparable economic circumstances.

An aggregate tax cut of $850 billion would allow the corresponding stimulus to be distributed by market forces without any top-down economic engineering. The economy knows how to mend its holes all by itself when left to its own devices. In fact, the results of such a measure may turn out to be so astounding as to undermine the Democratic Party’s anti free-enterprise rhetoric–and the Obama administration cannot afford such a blow, so the next best stimulus option is, of course, the  redistributive, make-work government spending-spree we’re going to get.