Mitch Daniels Revisited

| Thu Sep. 9, 2010 11:33 AM EDT

After plowing my way through the Mitch Daniels saga yesterday, I was surprised to read Ezra Klein today agreeing that Daniels had proposed a conventional stimulus plan:

The parties disagree on a lot of things, but they don't disagree over the idea that the government should act to increase demand when the economy sags. The theory behind a payroll tax cut (the government increases its deficit in order to get more money to people who can spend it so they will increase demand) and an infrastructure investment (the government increases its deficit in order to get more money to businesses who can spend it) is not theoretical, but practical: Do you think one is more stimulative than the other, and do you think one is more worthwhile than the other?

And Matt Yglesias agreed. Daniels' plan isn't as praiseworthy as all that, he says, but "that doesn’t mean it wouldn’t be effective stimulus relative to the policy status quo, and viewed in that light much is forgivable."

Am I missing something? In Ezra's interview with Daniels yesterday, Daniels addressed some of the confusion from his original op-ed and made it crystal clear that he didn't intend for his plan to increase the deficit either in the short term or the long term. In fact, he went so far as to say that if his spending cuts turned out to be smaller than he hoped, he'd cut back on the payroll tax holiday in order to keep things deficit neutral.

Would this act as a stimulus anyway? It might, possibly, at the very margins. Perhaps a payroll tax cut has a higher multiplier than than the TARP and ARRA spending Daniels wants to cut. Or maybe it would have a faster effect. But those are tiny effects at best. If Daniels intends for his plan to be deficit neutral, it's not neo-Keynesian or neo anything else. It's just a temporary tax cut, and even the supply siders don't give temporary tax cuts any credit for stimulating the economy. I don't think anyone else would either.

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