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My, My, Those Tax Cuts Look Big

President-Elect Obama is now willing to include as much as $300 billion in tax cuts as part of his proposed economic stimulus. While the final numbers aren't set yet, those tax cuts would apparently account for roughly 40 percent of the total package, which is expected to come in at arond $600 to $700 billion total. Some of the cuts would benefit individuals; others would go straight to businesses, as incentives to create new jobs. The rest of the stimulus would take the form of public investment--i.e., government spending on things like infrastructure, aid to states, and so on.

Strictly on the merits, does this approach make sense?

The general consensus among left-of-center economists these days is that government spending, rather than tax cuts, represent the most efficient way to fight recessions. Among other things, people who receive tax cuts don't always spend the money right away. More affluent people, in partciular, tend to put that money into savings--a move less likely to generate economic activity in the short term. (For more on this, see Hilzoy's post over at the Washington Monthly blog.)

On the other hand, coming up with $600 to $700 billion in well-timed government stimulus may not be as easy as it sounds. For a while now, Obama advisers have been warning that there are only so many ready-to-go infraustructure programs--and only so many social needs the states are prepared to meet quicky. To give you a sense of scale, total non-discretionary, non-military spending this year is only around $500 billion. As Paul Krugman explains on his blog,

...there’s a problem with a public-investment-only stimulus plan, namely timing. We need stimulus fast, and there’s a limited supply of “shovel-ready” projects that can be started soon enough to deliver an economic boost any time soon. You can bulk up stimulus through other forms of spending, mainly aid to Americans in distress--unemployment benefits, food stamps, etc.. And you can also provide aid to state and local governments so that they don’t have to cut spending-avoiding anti-stimulus is a fast way to achieve net stimulus. But everything I’ve heard says that even with all these things it’s hard to come up with enough spending to provide all the aid the economy needs in 2009.

It's this line of thinking, as much as the package itself, that has Krugman--and others, like Kevin Drum, at Mother Jones--concerned. Obama just won a substantial victory in the presidential election, bringing with him huge congressional majorities. And it's not like the country is in an uproar over the prospect of a large stimulus focused on spending. (I imagine most people haven't even given the issue that much thought.) So why not just push through a more pristine proposal? Here's Drum:

Obama's team is so focused on getting a big bipartisan majority for their stimulus legislation that they're negotiating their goals down even before they actually start negotiating. I'm reluctant to critique Obama's political instincts, since they've proven shrewd so often in the past, but I gotta say: this isn't going to work. Obviously Obama needs a modest level of Republican support just to get the bill passed, but he doesn't need 80 votes, and straining to get there will just produce a watered-down plan without getting anything in return. The American public really doesn't know or care if this bill passes by one vote or thirty votes. So why waste time on this? It's just a gold-embossed invitation for Republicans to obstruct and posture endlessly, something they hardly need any encouragement for.

I am generally inclined to give Obama the benefit of the doubt on politics. I second-guessed his strategic wisdom on more than one occasion during the campaign. In virtually every instance, I was wrong. Avoiding the skirmish here might make sense, both as policy and politics, as long as the tax cuts are temporary and as long as, for the most part, the individual cuts at least provide financial relief to people who can use it. (Note, too, that the business cuts may not actually cost that much in the long run, since many businesses will simply claim deductions now they'd otherwise claim in future years.) Still, it's hard not worry that this is a (discouraging) sign of things to come.

Update: An Obama adviser responds

--Jonathan Cohn