Tuesday, December 30, 2008

Larry the Stimulus Guy

Lawrence Lindsey makes more sense than most of the current and former officials opining on a Federal stimulus package. Generally, he prefers particular tax cuts to infra spending. I can't say I agree with everything he says, but Lindsey makes several good points.

I think his criticisms of infra spending are generally valid, and he admits that while some such spending may be good, it can hardly be called a reliable economic stimulus.

Lowering (or at least promising not to raise) taxes on dividends and capital gains accomplishes Lindsey's criteria for effective stimulus - it addresses the problem (household wealth), it is timely (immediate), and it fundamentally strengthens the economy going into the expansion phase.

However, Lindsey is really pounding the table for a decrease in the payroll tax. I think his analysis is right that it will work, and for the reasons he states, but I am hesitant to further degrade the Social Security trust fund.

In the short run, effective fiscal stimulus requires that government revenue drop, thereby enriching the private sector, and with the Treasury making the Social Security trust fund whole by way of intergovernmental bookkeeping. Longer term, however, spending cuts or a new source of revenue would be needed.
There's the rub -- we're robbing the trust fund, and paying it back out of general funds. Lindsey's most promising source of future revenue is a carbon tax that can be phased in better economic times. Yikes.

But you can't have your cake and eat it too, and Lindsey's plan seems better than Obama's by any reasonable measure.


Samay said...

That's a really good point - payroll taxes are really regressive, but they're the most direct way to fund social security. Is there something less regressive related to workplace income that could supplement social security instead?

Sockless Joe said...

There really isn't, other than just giving up on (1) the whole goal of Social Security being actuarially sound and (2) the whole social pact of paying in to social security before taking out in later life. (Anybody who is OK with 1 and 2 anyway should probably support the Lindsey plan.)

The more I think about it, any stimulus is coming out of general funds, so why the heck not do it through the most efficient mechanism?

But how do you go back later and raise those taxes when the stimulus is supposed to be over? That would take political chutzpah the likes of which I don't believe exists. You can't undo it.