Tax Analysts Blog

Keynes Reborn: Stimulus Tailored to Republican Tastes

Posted on Dec 8, 2010

Basic economics tells us (1) America needs larger deficits in the short-term to fight unemployment and (2) America needs massive deficit reduction to promote long-term economic growth and prevent a Greek-Irish style fiscal meltdown. The Obama-Republican tax plan achieves the first goal admirably.

The proposal can be criticized in terms of cost-effectiveness because estate tax cuts and the preservation of low income rates for the +250K crowd are not the best way to stimulate aggregate demand. But nevertheless there is some stimulus effect to these cuts. Moreover, the plan includes highly effective stimuli in the form of expensing for business spending on capital equipment and payroll tax cuts for all workers.

The proposal has been subject to criticism by Democrats who say the President is caving to demands of Republicans who want to line the pockets of rich contributors. Well, yes but this is more than balanced out by other tax cuts, especially the payroll tax cuts.

Now here's the fun part. For a solid year Republicans have been deriding stimulus as failed economic policy. They said this classic Keynesian prescription for fighting recession simply does not work. But it was not really the economics that bothered them, but the politics. The bulk of 2009 stimulus package came in the form of spending increases which were abhorrent to the Right.

By repackaging stimulus in the form of tax cuts Obama--brilliantly, in my opinion--has conned the Republicans into embracing stimulus that just days ago they were deriding. This will reduce unemployment as we move forward to the 2012 election. That will help Obama more than his Republican opponent.

In the meantime, watch as Democrats change their tune about stimulus. They were strong supporters of Keynesian stimulus when it came in a form they liked and Republicans hated. Now that stimulus is packaged in a Republican wrapper their message will focus on the long-term fiscal problems caused by tax cuts rather than their short-term stimulative benefits. .

But we must keep perspective. All the short term stimulus stuff is great political theater. But it is a side show --and hopefully not a distraction from--the far greater economic problem America faces: long-term deficit reduction.

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