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A Republican stimulus that just might work

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Sept. 9 (Bloomberg) -- Steven Kroll, managing director at Monness Crespi Hardt & Co., talks about U.S. tax policy and the economy. Kroll and David Stockman, who was budget director under President Ronald Reagan, speak with Matt Miller and Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)

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By Ezra Klein
Sunday, September 12, 2010

It's been a long week of stimulus proposals here in Washington. Our anti-business White House proposed hundreds of billions in tax cuts for businesses, reiterated its support for $30 billion to support lending to small businesses, and proposed $50 billion in new infrastructure investment -- money that would go, ultimately, to pay private businesses to build things. Marx would be so proud.

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But the more interesting action was on the Republican side of the aisle. On Thursday, House Minority Leader John A. Boehner released a "two-point plan for immediate, bipartisan action on jobs and spending." Boehner's proposal? Extend the Bush tax cuts and pass a budget holding spending at 2008 levels. That's a bit back to the future -- or at least back to the Aughts. The worst economic crisis since the 1930s, and all we need to do is extend some tax cuts from 2001 and 2003 and hold down spending a bit? This doesn't require any new thinking at all?

The most stinging counterpoint didn't come from Nancy Pelosi, though. It came, quite inadvertently, from Indiana Gov. Mitch Daniels, a wonkish Republican who led George W. Bush's Office of Management and Budget from 2001 to 2003, and who, that same Thursday morning, published a plan that put to shame the proposals from both the administration and the House Republicans.

"A stagnant, impoverished America will not be a greener or safer or fairer place," Daniels warned. "Grown-ups make trade-offs. Pass the brandy, then let's get busy." And get busy he did: Daniels proposed a one-year suspension in the Social Security payroll tax for workers. In an interview, he estimated that this would raise about $350 billion. He also envisioned a tax break allowing businesses to fully expense their capital investments for the next year. As it happened, the administration proposed exactly that this week, though Daniels noted that there was no word of it two weeks ago, when he first drafted his op-ed. "If they're there," he told me, "that's good."

Put all that together, and Daniels is offering more than $500 billion worth of stimulus in 2011. Some of that would be offset by the policies he proposes to pay for the new spending (which include recapturing unspent funds from appropriation bills and the original stimulus, a hiring freeze for the federal government and giving the president authority to block congressional spending projects after they've been signed into law), but we're still talking about a very serious rescue package.

A year ago, these proposals would've put Daniels in lockstep with his Republican colleagues in Congress. This year, they put him much nearer to the increasingly desperate Democrats. And that might leave him in no-man's land.

In 2009, when Republicans were still proposing serious alternatives to the president's proposals, many of them -- including Sens. John McCain and Mitch McConnell -- supported a payroll-tax holiday. It was the administration that balked, preferring a more targeted tax cut combined with infrastructure spending, state and local aid and relief programs like unemployment insurance and food stamps. But the recession quickly overwhelmed the stimulus package Democrats had designed to contain it.

That might have been fine: Erring on the side of a smaller stimulus is fine, at least if Congress was willing to increase the size of the policy if the crisis proved larger than the policy. But that's not what happened: Rather than adjusting the stimulus effort upward, Republicans used the grim economy to drag the Democrats -- and most every secondary policy they offered -- down.

With the grim economy draining their popularity and Republicans turning the public against their stimulus proposals, Democrats began looking for compromises that Republicans might support. Fast forward to September 2010 and the Obama administration is down to proposing a raft of tax cuts for corporate America as its next major move on stimulus.

But as congressional Republicans looked toward an overwhelming win in the midterm elections, their interest in compromise waned. After all, "President Obama has proposed a sensible and bipartisan set of policies to improve the economy" is not a great message for the opposition party. If Obama is so great, why elect any Republicans at all?

The political logic is sound -- and Democrats hew to it when they're in the minority, too -- but it makes compromise difficult. It's why House Republicans are left without any new or ambitious policies to set the economy right. Better to be vague and win than constructive and lose.

Meanwhile, the administration is primed for something not far from what Daniels has laid out: It supports allowing businesses to write off capital investment, it has proposed a line-item veto similar to the "impoundment" procedure Daniels envisions, and it calls for a freeze in the federal government's discretionary spending. As for the payroll-tax holiday? Jason Furman, deputy director of the National Economic Council, says the White House would be open to it. "The president is willing to do whatever it takes to accelerate the pace of job growth and income creation," he told me. The only thing that it's hard to imagine the administration supporting is Daniels's idea for a temporary pause in enforcing environmental regulations.

What's harder to imagine is Boehner and the House Republicans joining with the administration to offer a major new stimulus package. There's a good chance that John Boehner will be Speaker of the House when Congress reconvenes in 2011, but he'll have gotten there by directing his flock to oppose most everything over the past two years. That's left him and his party with precious little they can actually support once burdened with the responsibility of actually governing.

Daniels sees his proposal as requiring something from both sides. "Republicans have to accept the responsibility to step forward constructively, and Democrats have to accept that we've been headed in the wrong direction with the expansion of government," he says. That sounds like a lot less compromise from the Democrats than the Republicans. Shouldn't constructive engagement be expected from our politicians?

The real compromise from congressional Republicans will be agreeing with the administration about something. Giving the other party's president an accomplishment is always hard. But to Daniels, this set of tax cuts and spending reductions is worth it. The alternative is too painful to contemplate.

"I've been searching every day for evidence that the economy is getting on its feet in a big way," he says. "I haven't been able to find it. I still see as many downside risks as up. So I don't overclaim for this set of ideas, but I do think that all parties here have a stake in action."

He's right. So pass the brandy, and let's get on with it.


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