Obama Stimulus 2.0

We are getting some more details on Barack Obama's stimulus/recovery package. (The WSJ's take is here. The NYT's take is here.) The big news is an increased emphasis on "tax cuts", to the tune of $300 billion over two years. Two aspects we have heard before, tax credits for middle- and lower-income workers, as well as a tax credit for businesses who hire new workers. New is a proposal to allow writeoffs for large and small businesses. From the WSJ:

As for the business tax package, a key provision would allow companies to write off huge losses incurred last year, as well as any losses from 2009, to retroactively reduce tax bills dating back five years. Obama aides note that businesses would have been able to claim most of the tax write-offs on future tax returns, and the proposal simply accelerates those write-offs to make them available in the current tax season, when a lack of available credit is leaving many companies short of cash.

A second provision would entice firms to plow that money back into new investment. The write-offs would be retroactive to expenditures made as of Jan. 1, 2009, to ensure that companies don't sit on their money until after Congress passes the measure.

Another element would offer a one-year tax credit for companies that make new hires or forgo layoffs, which could be worth $40 billion to $50 billion. And the Obama plan also would allow small businesses to write off a broad range expenditures worth up to $250,000 in 2009 and 2010. Currently, the limit is $175,000.

With all this talk of short-term stimulus, how fortunate that Stanford University economist John Taylor just a presented a paper on the wisdom of such policies. Here is a key portion:

There is little evidence that short government impulses will jump start an economy adversely affected by other forces. In the current recession, the economy has been pulled down by the housing slump, the financial crisis, and the lagged effects of high energy prices. Expectations of future income and employment growth are low because the effects of the financial crisis are expected to last for years into the future. Unless these effects are addressed, a short-term fiscal stimulus has little chance of causing a sustained recovery.

The theory that a short-run stimulus will jump start the economy is based on older “Keynesian” theories which do not adequately include, in my view, the complex dynamic or general equilibrium effects of a modern international economy. ... The problems with such models can be illustrated by again using the evidence from the rebates, and I believe similar problems arise when analyzing other stimulus proposals as well. For example, according to model simulations of Mark Zandi (2008), GDP would have risen by about a dollar and a quarter for every dollar of a refundable one-time rebate. But  ... the impact was only a few pennies for each dollar and insignificantly different from zero in 2008.