The Magazine

The Right Stimulus

Republicans need to propose one since Congressional Democrats haven't.

Feb 9, 2009, Vol. 14, No. 19 • By MATTHEW CONTINETTI
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The plan might start with a payroll tax holiday. Lawrence Lindsey and John H. Makin have done a ton of work outlining why a payroll tax cut or temporary suspension would be good for the economy. Makin writes that a 12- to 18-month suspension in the payroll tax would immediately increase personal disposable income by 3.5 percent. Workers would have an instant raise that would be larger, and last longer, than the "Making Work Pay" tax credit in the Democratic plan.

Just as important, the payroll tax holiday would lower the cost of labor. Freed of the tax, employers would have an easier time hiring workers and paying them well. Yes, cutting or suspending the payroll tax would increase the deficit. So would the Democratic plan. But, if we are going to run deficits, we might as well do so in a way that increases the chances the economy will improve. The payroll tax holiday passes that test.

President Obama should find it hard to resist such a proposal. The payroll tax hits 60 percent of Americans, so a holiday would benefit a large majority of the president's constituents. Furthermore, since the payroll tax is regressive, cutting or suspending it would help the poor the most. Obama could be bipartisan, pro-labor, and pro-business all at once. Catnip to a politician who likes to avoid division.

Republicans also have to overcome some of their aversion to government spending. The flaw in the House stimulus bill is not that it spends money. It's that it spends money too slowly, and what money the bill does spend hardly goes to durable public goods. Thus the GOP's job: Shift the direct spending from useless liberal appropriations to constructive and long-lasting conservative projects.

First, Republicans could propose a more generous unemployment benefit than the one the Democrats are offering. The Republicans want to be the pro-family party. That should include families whose breadwinners are out of work. The money could come from eliminating the endless tax loopholes and subsidies for alternative energy in the current plan. Put the Democrats on the spot. Who do they care about more? Greens or the unemployed?

House minority leader John Boehner scored a victory when he attacked the millions of dollars in subsidies for contraceptives in the original House plan. Boehner put Obama on the defensive. The subsidies were stricken from the bill. Good start. Now up the ante. Why not ask that the contraceptive money go to suburban commuters instead? Send it to state and local governments to help them implement innovative programs like congestion pricing and private-public toll roads.

More than 55 million people live in the Northeast Corridor. They spend most of their lives stuck in traffic. They will be grateful to the political party that stops spending on refurbishing government office buildings and instead uses that money to construct bridges, roads, tunnels, and overpasses. Why? Because they recognize that more pavement shortens commutes, improves productivity, and lets them have dinner with the kids.

Ideally, a conservative stimulus would split direct spending between infrastructure and defense. The American Enterprise Institute's Tom Donnelly has crunched the numbers and made the case for defense stimulus at length (you can find his report on AEI's website). A plan like Donnelly's would build on President Obama's promise to expand the size of the Army and Marine Corps. It would give soldiers a raise and better health care, replenish U.S. weapons inventories, and create American jobs through defense contracting. It would spur investment and job creation in spin-off industries such as aerospace and the IT sector. It would promote the most important public good: security. And economic recovery is more likely in a secure world than in one where American interests are at risk.

The Democrats' stimulus proposals are weak. Those plans barely meet the Democrats' own Keynesian standards for successful fiscal policy. But times are tough. Republicans needn't simply play defense. They can help the unemployed. Cut the payroll tax. Lay pavement. Rebuild our defenses. Watch the economy recover. And reap the political rewards.

--Matthew Continetti