As weakness in the housing sector threatens to depress economic growth in the second half of 2010, it’s a good time to revisit Greg Mankiw’s 2009 call for an investment tax credit.

Hal Varian, chief economist at Google, made a strong case for stimulus policies focused on increasing private investment. And it included this important aside:

One further warning about government stimulus: It makes little sense for the federal government to spend more if the states are forced to spend less. A significant part of the increase in federal government spending should be transfers to the states in order to keep basic government services available at the state and local level.

Recently, defenders of ARRA have been arguing that the stimulus hasn’t been given a chance to work because it has been balanced by the “anti-stimulus” of contraction in state and local spending. Varian’s argument anticipated this problem, and effectively counseled for an alternative approach on infrastructure and other spending.

The pro-ARRA camp insists that the unfunded tax cuts in ARRA represent a concession to the political right, which is interesting. I would happily have traded all of them for a large ITC.