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Baker: Is This Stimulus Big Enough?

Another expert I consulted yesterday was Dean Baker, of the Center for Economic Progress. Here's what he wrote me:

The business tax cuts are presumably mostly political. The EITC -type cuts are progressive and will be spent, so they are not bad. As you get higher up the income ladder with the $500 tax cut for workers, the percentage spent is likely to drop.

The track record on accelerated depreciation tax cuts and tax cuts for adding employees are not great. I will say that of all the business tax breaks, accelerated depreciation probably gives the best payback. So if you have to give business something, it is not a bad break to do.

Tax breaks for hiring new employees can and will be gamed. I am not a big fan.

On the other hand, the break that allows businesses to write-off losses against taxes paid 4-5 years ago (as opposed to 2 years in current law) is simply a give-away to the financial industry and homebuilders. These are likely to be the only businesses that will have losses so large that they can't fully deduct them from earnings over the last two years.

This tax cut has nothing to do with stimulus. It is difficult to imagine that this sort of tax break would even be considered if it were not for the political power of the financial industry.

I am somewhat concerned that if we're looking at a $700 billion stimulus and $300 billion is going to tax cuts, some of which will not be very effective stimulus, then the package will be far to small to deal with the size of the contraction.

On the other hand, my hope is that he will have some big boosts to health care spending coming later this year as part of his health care reform plan. We will need much more than $700 billion over two years to combat the downturn, but it does not all have to be in his initial stimulus package.

I've put that paragraph in bold type because I think, ultimately, that's what progressives should be thinking about. The big worry probably isn't the tax cuts themselves, at least some of which make sense; it's whether the overall package is sufficient to rescue the economy. Paul Krugman makes a similar warning on his blog today.

But I think Baker also is right when he says health care reform might offer additional opportunities for stimulative spending, at least in the short- to medium-term. For more on that, I'd recommend Jacob Hacker's contribution to our current issue.

--Jonathan Cohn