An anonymous commenter (whom I can only assume is Michael Woodford come to praise my deep and well informed knowledge of monetary policy) says,
Great work. Nitpck: if the aim of govenment stimulus is to “normalize” monetary policy by pushng interest rates above the zero bound, this can be accomplished most cheaply by directly subsidizing investment, rather than pushing for large increases in spending and hoping that crowding-out effects will lead to higher natural rates. The amounts involved would be vastly smaller, and it could even be done in a budget-neutral fashion, with no impact on the government’s long-run fiscal postion.
This is certainly true.
One of the nice things about a payroll tax cut is that because the tax is flat we don’t have to worry so much about stimulus being hijacked attempts at social or industrial policy.
Once we start saying “we are going to subsidize investment” then you are opening up the flood gates for rent seeking. I am not sure if that’s a better outcome than simply cutting payroll taxes.
Where I think I am most vulnerable is to a Ricardian Equivalence critique. That is, folks will say that temporary tax cuts will simply be saved. I think the evidence on this is mixed and it is less likely to be true in a financial crises than at other times. However, it is an important objection.