The Bils-Klenow Stimulus Plan

Economists Mark Bils of the University of Rochester and Pete Klenow of Stanford say we should cut the payroll tax to stimulate the economy. They email me their rationale:

Greg,

As part of a temporary fiscal stimulus, we would argue for subsidizing the payroll tax (employer and employee portions) out of general revenue over some sustained period, say calendar year 2009. It has some distinct advantages:

(1) Like previous stimulus efforts, it has the standard demand side impact (same as cutting checks). But it also stimulates employment directly by reducing the tax penalties for working and for hiring workers. Related, it works under all business cycle models (even including those obeying Ricardian Equivalence).

(2) It targets domestic production better than sending out checks (or a sales tax cut).

(3) It targets lower income households, due to the cap on social security taxes. These households may respond more in both their consumption and employment decisions.

Now, it does not target the unemployed. But, in combination with extension of unemployment benefits, those with labor force attachment are still covered. In fact, it helps limit the damaging effects of extending the duration of unemployment benefits in terms of distorting reentry and job creation decisions.

Mark and Pete

Intriguing idea. In light of my post from yesterday on fiscal policy puzzles, I am especially attracted to the goal of robustness: we should try to find a stimulus plan that works under a variety of alternative business cycle models.