How Should Conservatives React To The Stimulus Measures? Our Experts Weigh In.

Today we hear from Alan Viard and Edward Glaeser- affiliations listed at the end of each author's posting.

The current situation is so unlike most of the recent past that it is extraodinarily difficult to be sure about the appropriate size of the stimulus. In normal settings, I would view a vast increase in government expenditure and borrowing as a catastrophe. Today, I am skeptical but unsure.

I am, however, confident that the stimulus package can be significantly improved, and that the Republican Party could help renew itself by championing significant, smart reforms to the package. Help are three possible approaches.

Approach # 1: Put Freedom First. Individuals should have the freedom to make their own spending decisions, and that implies that the stimulus package should be primarily focused on tax cuts. However, these tax cuts should be focused on lower and middle income Americans, who are most likely to spend the cash and who need it most. This approach argues for a large, and temporary, cut in the payroll tax for middle and low income Americans.

Approach # 2: Build a Stronger America. The current infrastructure elements in the plan can be vastly improved, by focusing on projects where benefits exceed costs. A strong commitment to getting infrastructure right would be a credit to the G.O.P., and remind voters of Republicans' long history of investing in America's infrastructure from the Intercontinental Rail System to the Interstate Highway System.

Approach # 3: Remember Federalism. State and local governments are responsible for many of the most important services that government provides, including schools, safety and streets. Use the stimulus to strengthen state governments, and to prod them to provide better schools and faster commutes.

Edward Glaeser is Glimp Professor of Economics at Harvard University, Director of the Taubman Center for State and Local Government and a Senior Fellow at the Manhattan Institute.

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If done properly, demand stimulus can play a useful role in stabilizing the business cycle, boosting output during periods of economic weakness and reducing output during periods of economic strength. Normally, the best way to stimulate demand is through monetary policy and automatic fiscal stabilizers rather than through legislated fiscal stimulus packages. Many of the packages adopted during previous recessions have been ill-timed and may have actually destabilized the economy. But, given the severity and length of this recession and the limits on monetary policy (short-term interest rates are at zero and cannot go any lower), I have reluctantly concluded that a fiscal stimulus package is now appropriate. It is important, though, to reduce the size of the package (and the corresponding costs on future taxpayers) and to adopt only those measures that will provide a timely boost to aggregate demand. Personal and business tax cuts and government benefit payments can provide such a boost.

In contrast, most forms of government purchases of goods and services are not suitable for stimulus purposes; repair and maintenance spending may be an exception. Trying to use such purchases as demand stimulus offers the worst of both worlds. A large expansion of government projects is legislated and initiated too rapidly to ensure proper planning and budgeting, inviting waste and inefficiency. Yet, the actual spending from these long-lived projects occurs too slowly to provide a timely stimulus. The bill moving through Congress includes large amounts of government purchases that have no place in a well-designed stimulus package and that should be removed. (If some of these programs are sensible long-run investments, they should be approved and paid for through the regular budget process, not included in an emergency deficit-financed stimulus package.) Also, all Buy American provisions and all Davis-Bacon rules requiring the payment of above-market wages should be deleted from the bill.

We must always keep in mind the sharp distinction between stabilization policy and long-run tax policy. Stabilization policy should try to stimulate demand when the economy is weak and to depress demand when the economy is strong. Long-run tax policy should ignore aggregate demand; it should instead focus on reducing disincentives to work, save and invest while correcting the fiscal imbalance. As we address the short-term pain of the recession, we should not lose sight of the tax and spending policies that will promote long-term prosperity.

Alan D. Viard is a Resident Scholar at the American Enterprise Institute.

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I believe that the current economic downturn is a crisis situationÑsecond only to the Great Depression. I believe we should err on the side of doing too much rather than too little. Yes, the stimulus package is poorly designed, but we don’t have time to design a better one. Time is of the essence. The longer it continues, the harder downward economic momentum is to stop.

Bruce Bartlett is a former Treasury Department economist.

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I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift. I recognize that some state governments are now struggling in light of the macroeconomic crisis. For the next two years, I would let each state governor have the authority to divert a portion of the payroll tax cut in his or her state and take the funds instead as state aid. Those governors who think they have valuable infrastructure projects ready to go would take the money. When designing a fiscal stimulus, there is no compelling reason for one size fits all. Let each governor make a choice and answer to his or her state voters.

N. Gregory Mankiw is the Robert M. Beren Professor of Economics at Harvard University.

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What the American economy urgently needs is not Keynesian stimulus, but reform of the capital and housing markets, particularly in the rating agencies, bank portfolios, and government encouragement of reckless lending. That is where the problem started, and where it might have remained-- with the mild recession of the first half of 2008-- if Presidents Bush and Obama had reassured the American public rather than predicting doom. Whether Keynesian stimulus works is an open question in economics, but it is fairly well settled that what governments implement is not the nonpolitical stimulus that professors recommend. The various Congressional proposals so far are not stimulus bills at all. They are a mix of special- interest tax cuts and pork barrel spending with a general-interest layer of tax cutting on top. It would be better not to try to use fiscal stimulus at all.

Eric B. Rasmusen is the Dan R. and Catherine M. Dalton Professor at the Kelley School of Business, Indiana University.

Image courtesy of wiredbike.