tax policy, "stimulus," and the new administration

Fiscal policy will play a central role in the new administration, although the tax part may be secondary to the spending part for a time. What is the Obama team proposing, what are the Republicans countering, and who's right or wrong?

Basically the Democrats are proposing an $800 billion stimulus package, of which the majority is increased spending and something like $300 billion "middle class" tax cuts. This is on top of money already allocated to financial institution relief or bail-out (take your pick) and additional promises like universal health care, changes to social security and medicare, etc. (These last are supposed to save money, although that hasn't always been the case.) The spending appears to be a grab bag of infrastructure and education programs, increased unemployment assistance, assistance to State and local Governments, and so forth; much of this will undoubtedly change during the markup process.

The Republicans, bouncing back from their latest electoral debacle, have countered with proposals to (surprise) place somewhat more emphasis on tax cuts, including businesses as well as individuals, and to rein in or at least target the spending increases better. Republicans (and some Democrats) have also complained about use, or misuse, of the financial bailout funds. A cartoon, reprinted in Sunday's NY Times, suggested that the public would prefer Tony Soprano to ensure that funds are used wisely.

There are also the usual run of expiring and other tax provisions, which would attract attention in an ordinary year but are taking something of a back seat now.

My instinct is that the Republicans are right to challenge Obama on both the general philosophy and the details of his "stimulus" package. Economic stimulus is such a broad term as to be almost entirely meaningless: a program of Reaganesque tax cuts and military spending increases would qualify as a stimulus program, as would sprinkling money from helicopters. While more spending on education or infrastructure may be good ideas in their own right, it's hard to see what they have to do with the current fiscal crisis, or (if the goal is imply to inflate the economy at all costs) why they are better than other alternatives. It is likewise entirely proper to ask where the Wall Street bailout funds are going, a looming scandal that the public has only begun to focus on, and whether the new ones will go to necessary or merely pork-barrel projects.

The problem is that the Republican alternative, in particular the tax portion, is even less well targeted than the Democrats'. It's not entirely clear what led to the current crisis, but it almost certainly wasn't high corporate tax rates. The GOP, like some liberal Democrats, thus risks appearing to push a discredited agenda that has little or anything to do with the current mess.

My own feeling is that everyone needs to take a step back and think about correcting the problems that led to the current meltdown, including excessive debt, poor financial regulation, and weaknesses in key industries--including the political system--and try to fix those rather than rushing headlong into a huge stimulus package that will create gargantuan deficits without necessarily addressing any of the underlying issues. Real tax reform, as opposed to willy-nilly tax cuts, might be an important part of this program. It may be that it is too late for all this, that the economy simply requires a large infusion of cash and it doesn't matter all that much how it gets there. Perhaps, as Yogi Berra might put it, half of the crisis is 90 percent psychological, and it is more important to take bold action than to worry exactly what action is taken. But it's rarely a good idea to fight new evils with methods designed for old ones, and I have the distinct sense that is what both Democrats and Republicans are doing. Both Kennedy and Reagan inflated the economy, and both were pretty popular presidents. But where were the economy, and the Government, a few years later?