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Congress Warms to a Third Stimulus

As we learned last week, Christina Romer's calculation suggested that the stimulus bill should have been $1.2 trillion, rather than $800 billion. That calculation predicted a gap of $2.5 trillion between what the economy was producing and what it could be producing. We now think the gap is nearer to $4 trillion.

The stimulus, in other words, was too small for the problem we were facing, and that was before the problem proved a lot bigger.

Congress isn't likely to approve a second stimulus. But they might be open to a tax cut that would stimulate the economy. Catherine Rampell even catches Rep. Eric Cantor making the case for it.

The difficulty with job-generating tax cuts is that a lot of the money goes to firms that would've created that job anyway. A lot of the money "leaks." But even with that money leaking, the proposal can do a lot of good, and relatively cheaply compared with other methods of creating jobs. Some estimates suggest that the policy proposals floating around could create two million jobs at a cost of $20,000 a job. For now, that's probably the best we can do.

By Ezra Klein  |  October 7, 2009; 11:44 AM ET
Categories:  Solutions , Taxes  
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Comments

I don't understand why there isn't a clamor to give aid to the states. State workers, teachers, etc., are all losing their jobs at a crazy bad pace.

Posted by: AZProgressive | October 7, 2009 11:53 AM | Report abuse

It's Cash for Clunkers--Jobs Edition. Seems like there would be lots of gaming the system but if this is the only way we can get a jobs program then we should do it. Definitely also need to extend unemployment benefits--more than 13 weeks.

Posted by: bmull | October 7, 2009 11:55 AM | Report abuse

Well next year is an election year.

I see checks going out!

Posted by: RedBird27 | October 7, 2009 12:10 PM | Report abuse

A tax cut might be a good solution done right, but I would want a sunset on it. It is too hard for Congress to raise taxes. Our current level of taxation is too low, let alone what a reduced level of taxation would be given this proposed cut (yes, I believe the Laffer curve is pure fantasy)

Posted by: scott1959 | October 7, 2009 12:13 PM | Report abuse

I agree with the first post, which is a point everyone looking at the Stim and where the economy is right now realistically: State & Local Governments are dying at the moment. "Tax Cuts" aren't going to save them. Collins, Snowe, Nelson & Spector took a hatchet to the State Aid in the last Stim, and instead pushed money into Tax Breaks.

We're also forgetting that first Stim back in 2008 was also Tax related.

None of these are really dealing with Jobs. And as quite a few people are pointing out, it's State & Local governments and programs that are bleeding jobs at the worst rate right now.

We've got to stop addressing the major issues of the country by instantly looking towards "what's easiest to pass", and focusing on what the GOP might vote for. In the end, other than tax cuts they'll vote for nothing. We need to make the hard choices. Right now, it's getting State & Local Govs through this nightmare.

John

Posted by: toshiaki | October 7, 2009 12:26 PM | Report abuse

Ezra,

How about an assignment desk piece? I know you're Mr. Art of the Possible and we're talking short term stuff in this thread, but what about the long term? Our 17%+ un-and-under-employment is now 50-80% structural, I believe. Meaning, Obama's best case is to drop that to 14-15% by 2012, and that might be the long term best case. Why? Loss of critical mass in manufacturing, services outsourcing, all as expressed in our seemingly permanent trade deficit.

Do you agree? If you do, what do we do about it?

I would argue that the party in power, led by the President needs an employment strategy, call it a Contract for Working People in America:

1. separate health care costs from employment. We can't tax employment 20-30% with health care costs.

2. Heavy investment in R&D.

3. Rework of all corporate tax and policy incentives, to maximize legal favors to domestic employers and minimize those to outsourcers and importers.

4. Multi-level education reform, with special emphasis on targeting 12-30 year olds to improve educational outcomes - fewer dropouts, more GEDs, more technical college training, more college grads in math and science.

5. Fair trade - effective regulation that ensures that imported goods and services do not enjoy monetary advantages based on arbitrage of labor, health, safety or environmental laws. Actual inspection and enforcement.

This is a ten year plan and it will require commitments, and milestones and political will.

What about it, Ezra? This is real policy - can you share your thoughts?

Posted by: Dollared | October 7, 2009 12:51 PM | Report abuse

Agree that it is state and local governments that need the money. It's insane that teachers have been laid off at a time when our students isn't learning what they need, and in California agencies that collect fines and fees can;t collect because they have had to lay off too many people.

And companies don't need tax cuts, they just need the top management to sacrifice a little of their own salaries and perks so that people could be hired in $25,000 and up jobs. I'm not talking about small business here--those folks need health care reform that makes a difference now.

People can't spend money they don't have, and they don't need the chance to run up more debt, they need jobs.

Posted by: Mimikatz | October 7, 2009 12:55 PM | Report abuse

I'm with AZProgressive, Toshiaki and Mimikatz. State and local governments need the money — now.

Here in California, the University of California is busily turning itself into a second-rate public university system with 10% cuts, layoffs and furloughs. And my son's kindergarten class in an Oakland public school has 25 kids and one teacher.

The state budget couldn't even be balanced after looting yet more money from the counties (granted, California's budget crisis is also due to a couple of 2/3 vote requirements).

Posted by: friscokid | October 7, 2009 1:57 PM | Report abuse

Given that the first stimulus was designed to pay out most of its money long after it will ever be needed, a second stimulus seems to me to be just piling wishes upon wishes. It's going to be illusory one way or the other.

And state governments are ridiculously unworthy charity cases. Just to take one example, Virginia's state government budget grew by about 40% in the last four years, and that's typical of most states. For the state governments to claim that every bloated dollar in their budgets is sacred, and to plead poverty because they can't squeeze their constituents as hard as they could in boom years is meretricious and will go over like a lead balloon with voters. What would the pitch be? "Remember how much you liked it when we gave your money to Goldman Sachs and AIG? Well, you're going to love when we pour even more into California's bottomless state treasury!"

Posted by: tomtildrum | October 7, 2009 5:45 PM | Report abuse

Only $600 Billion was actually stimulus. Thus we spent 50% of what we should have.

Posted by: zosima | October 7, 2009 8:12 PM | Report abuse

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