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Some conservatives are getting it

January 29th, 2009 · No Comments

We wrote yesterday that the Republican resistance against the stimulus plan was a mistake, at least when it is based on the wish to include more tax cuts. If you didn’t believe us, or even Paul Krugman, here is a conservative economist arguing the same..

Who is he? Martin Feldstein, he played a major role under Reagan. Here is what he had to say:

  • As a conservative economist, I might be expected to oppose a stimulus plan. In fact, on this page in October, I declared my support for a stimulus. But the fiscal package now before Congress needs to be thoroughly revised.
  • Start with the tax side. The plan is to give a tax cut of $500 a year for two years to each employed person. That’s not a good way to increase consumer spending. Experience shows that the money from such temporary, lump-sum tax cuts is largely saved or used to pay down debt. Only about 15 percent of last year’s tax rebates led to additional spending.

There you go.. He’s also not too keen on the business tax cuts:

  • The proposed business tax cuts are also likely to do little to increase business investment and employment. The extended loss “carrybacks” are primarily lump-sum payments to selected companies. The bonus depreciation plan would do little to raise capital spending in the current environment of weak demand because the tax benefits in the early years would be recaptured later.

On the other hand, he points out some tax cuts that would work, mainly as special incentives to refurbish houses and stuff like that, but administering these is likely to be expensive.

He’s not too keen on many of the spending items either (which conservative would be?) and these are indeed a matter of debate, although we’re not entirely sold on his suggestion of increasing military spending as the most efficient way to get dollars into the economy, but that might be a matter of taste, rather than pure economics, we have to admit.

Tags: Credit Crisis