Keynesian questioning of the stimulus

Arnold Kling has a terrific essay on the stimulus bill. The essay provides background on the different traditions in macroeconomics (Classical, Keynesian, Monetarist) and how they view the current crisis. He also gives some reasons why Keynesians themselves might not like the stimulus bill as is:

"Another group of skeptics is concerned about the timing of the fiscal stimulus. Even some economists on the left, including Alice Rivlin and Jeffrey Sachs, have made the point that the long-term spending in the stimulus bill is inappropriate and even counterproductive from a stimulus perspective. I share this concern. President Obama said that his goal is to have 75 percent of the stimulus take effect before the end of 2010. Instead, I would argue that we should have 100 percent take effect by then, and 75 percent take effect by the end of 2009...

Textbook Keynesian economics says that a spending increase will stimulate more powerfully than a tax cut, because part of a tax cut will be saved rather than spent. However, this same textbook analysis says that a stimulus now is more powerful than a stimulus that kicks in two years from now. Even though the multiplier for a spending increase may be higher than that for a tax cut that is enacted at the same time, we can be certain that the “multiplier” for a tax cut in 2009 is greater than the multiplier for a spending increase in 2011."

There's an old joke about how using government spending to stimulate the economy is like notifying the Fire Department of a fire via the mail. It's really hard to spend that much money that quickly and it's even harder to spend it well. Kling notes that there are other ways to do fiscal stimulus beyond digging ditches:

"A traditional stimulus proposal, going back to the 1960s, is a temporary investment tax credit. With such a credit, the government in effect provides matching funds for firms that undertake investment while the tax credit is in effect (say, through March of 2010). This would lead to spending increases that are a multiple of what the government contributes.

Another proposal, which George Mason University’s Bryan Caplan has suggested, is a cut in the employer portion of the payroll tax. The extra kicker here is that it reduces the employer’s cost of labor, thereby stimulating hiring. I think an additional kicker is that this would restore profitability in the nonfinancial sector, helping to boost investment."

I personally agree with the need for government provided fiscal stimulus. I think many parts of the stimulus bill are good and worthwhile--unlike Louisiana governor Bobby Jindal, I think that volcano monitoring is a legitimate government function. But if more stimulus is needed--and many people think that it will be--something like Caplan's payroll tax cut is worth trying. The payroll tax is a 13% tax shared by employers and employees. If you cut the employer portion, you make firms more profitable and encourage hiring by making labor less expensive; if you cut the employee portion, you have substantial a tax cut on a regressive tax paid by all working Americans, no matter how poor. If you cut both, you can support employment and consumer spending.

Where I disagree with Kling is on his dislike for aid to state and local governments. While he is right to argue that the private sector has seen much more layoffs than the public sector, I don't think that means that money spent on the public sector is wasted. First, aid to state and local governments will prevent layoffs, and jobs saved are good no matter what sector they're in; and second, the aid will help support Medicaid, food stamps and other programs for the poor.