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The Tao Of Lanny Davis

The Washington Post asked a bunch of economists and politicos to think through the implications of another stimulus this weekend. Some good stuff in there, which we'll get to in the next post. But first, a word to Lanny Davis:


"As a liberal Democrat," writes Davis, "I favor a new stimulus." I lean left too, but I favor stimulus because the economy needs an artificial shock to overcome the slump in demand, and I consider the dangers of prolonged recession to be larger than a small increase in national debt. It's not really a question of ideology.

But so be it. The weird bit comes a moment later, when Davis argues that we should fund an infrastructure program with "a surtax for everyone."

There are certain priorities that I could imagine meriting a broad-based new tax. Averting climate change, say. But a stimulus is meant to increase household spending, not impose further economic stress which would decrease household spending. The surtax might well cancel out the effects of the stimulus, or worse. Which Davis, to his credit, acknowledges. "I admit," he writes, "[It] seems to defy economic logic. But so far economic logic hasn't worked."

And that, dear reader, is by far the nuttiest thing I've read today. It's more like a zen koan than a commentary on the recession -- which has followed economic logic pretty precisely, with roaring consumption based on an unsustainable debt load eventually blowing up in everybody's face -- or the need for a third stimulus. It's not just doing by not-doing. It's doing by un-doing. And it suggests that Davis is playing on a whole other mystical level here. He's like the Dr. Strange of economic commentary.

By Ezra Klein  |  July 13, 2009; 12:15 PM ET
Categories:  Economic Policy  
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Next: Planning for a Third Stimulus


The weirdest thing about Davis' infrastructure/surtax combo, besides its self-defeating nature as stimulus, is that few things justify long-term Federal borrowing like a major infrastructure program.

Since the costs all happen in the short term, but the benefits of infrastructure investment play out over decades, it makes sense to borrow the money so that you can pay back the bonds out of the revenues from the increased prosperity resulting from the infrastructure improvements.

It's exactly like taking out a 30-year mortgage on a house: I don't want to pay for the house upfront, even if I could afford to, when the benefits of living in the house will be spread over decades. It makes more sense to borrow the money upfront, and pay for the house in increments as I realize the benefit of the house over time.

So a surtax to pay for needed infrastructure investment wouldn't even make sense if the economy were in good shape, and we had no need for a *second* stimulus.

Posted by: rt42 | July 13, 2009 12:35 PM | Report abuse

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