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Planning for a Third Stimulus

Weird missives from Lanny Davis aside, there are actually a bunch of good ideas in the stimulus roundtable. Robert Reischauer's contention that another stimulus should be paired with "time-released" revenue measures, for instance, has a lot to recommend it:

[A]ny "Son of Fiscal Stimulus 2009" should include a significant "time released" package of deficit-reduction measures. While these tax increases and spending cuts shouldn't begin phasing in until 2013 or 2014, when the economy has recovered, we need to send a strong signal to our creditors that, notwithstanding our addiction to another shot of fiscal stimulus, we will soon be on the recovery road to fiscal responsibility. If we don't, the nation could face a more serious economic collapse in the not-too-distant future -- without an ability to borrow to finance needed fiscal stimulus.

In a more responsible political system, that's the sort of compromise that deficit hawks would actually demand. Rather than cutting a necessary, and already underpowered, stimulus by an arbitrary sum -- which was their strategy the last time around -- they'd take both the need for short-term demand infusions and long-term debt considerations seriously, and build them both into a bill.

Elsewhere, Moody's economist Mark Zandi articulates what is, I think, the sensible position for the wait-and-see crowd:

It is premature to conclude one way or another if the economy needs another dose of fiscal stimulus. The current stimulus has not had a sufficient opportunity to work, and while it has already provided some benefit to the economy -- the downturn would be even worse without it -- its benefit won't be fully felt until later this year. A reasonable judgment regarding the need for more stimulus should wait until year's end.

Planning now for another round of stimulus is prudent, though, given that the economy remains in an extraordinarily severe downturn and the risks are decidedly to the downside. If additional stimulus is needed, then it probably should include more aid to hard-pressed state governments, whose budget woes are intensifying, more aid to stressed households hammered by what will be double-digit unemployment, an expansion of the housing tax credit to stem the ongoing slide in house prices, a delay in legislated increases in marginal personal tax rates in 2011, and perhaps even a payroll tax holiday.

As long as you believe there's some chance that a third go-round will prove necessary, you should support advance preparation. The 2009 stimulus had its problems, and many of them had to do with the speed with which the economy had bottomed out, and thus the speed with which the young administration needed to get a serious stimulus signed and started. As we can see, even that wasn't fast enough. But even if we're not likely to pass another stimulus in the next few months, there's no reason the relevant congressional committees couldn't be asked to draft a few options and then refine the most promising ones. Then, if we do decide we need a third stimulus, we won't have to scramble to figure out what it will look like.

By Ezra Klein  |  July 13, 2009; 12:39 PM ET
Categories:  Economic Policy  
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Interesting that Robert Reischauer's time released tax increases and spending cuts are timed right after the 2012 election. I wonder why that would be?

Posted by: lancediverson | July 13, 2009 1:17 PM | Report abuse

Why don't we forget the word "stimulus" and start working on a jobs program? If more Americans were working and fewer were afraid of losing the jobs we have, then more of us would be paying our mortgages and buying stuff. That would stimulate the economy.

Posted by: qalice1 | July 13, 2009 5:13 PM | Report abuse

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