I began this blog at the end of March after the stimulus bill had become law. I had been struck by how much the stimulus debate had focused on whether the bill was efficient. (It clearly was not.) There was much less discussion of whether the stimulus would be effective, and of the timing of the macroeconomic boost.

Everyone wants to know when the U.S. economy will start growing. I will focus on a related question: when will the stimulus law begin to have a significant positive effect on U.S. economic growth? And could it have come sooner if the Administration had done something different?

I believe the Administration made an enormous mistake in its legislative implementation of the stimulus. As a result, the boost to GDP will come six to nine months later than it needed to (maybe more). Given the President’s desire to do a large fiscal stimulus, and given his policy preferences, he could have had a different bill that would have been producing significant GDP growth beginning now, rather than in the middle of next year. That’s a huge mistake with real consequences for the U.S. and global economies.

To illustrate this point, let me classify four types of fiscal stimulus:

1. a permanent tax cut;
2. a temporary tax cut;
3. one-time checks to people independent of their tax liabilities; and
4. increased government spending through federal and state bureaucracies: infrastructure, energy spending, etc.

There is of course a fifth option: no fiscal stimulus law.

If you’re going to do a fiscal stimulus (big if), the best kind is a permanent tax cut. It is effective, efficient, and fast:

• effective – People spend a large proportion of a permanent tax cut. This is derived from Milton Friedman’s “permanent income hypothesis.”
• efficient – People spend their own money on themselves, so they waste very little of it, and they spend it on things that matter to them. Again, see Milton Friedman.
• fast – Checks are delivered quickly, and people spend most of their own money soon after they get the check.

This was part of the short-term logic behind the 2003 tax cut, which we designed to foster both short-term and long-term economic growth. I also have a strong general policy preference for lower taxes rather than more government spending, but […]