A Federalist Fiscal Stimulus

Many economists are calling for another fiscal stimulus package. For example, Martin Feldstein, who once wrote an article called "The Retreat from Keynesian Economics," recently pulled a full Keynesian in an article in the Washington Post:

The only way to prevent a deepening recession will be a temporary program of increased government spending.

Marty thinks the tax rebates earlier this year did not do much to stimulate consumer spending. I think Marty is too quick in reaching this conclusion: Other scholars who have seriously analyzed the data disagree.

If there is going to be another fiscal stimulus, there will likely be a division between those who want tax rebates to households and those who want to help states pay for extra infrastructure spending. I have a compromise, based on the grand U.S. tradition of federalism: Let each state decide.

Congress could pass a fiscal stimulus of a certain amount per person but offer two ways to have it paid out. Each state governor could be allowed to determine whether to take the money as state aid or have it paid directly to his or her state's citizens. Those governors who think they have valuable infrastructure projects ready to go would take the money. Those who do not would let their citizens take the extra cash. 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.