I’ve been asking friends and colleagues about what they’d do differently in January of 2009 to address the employment crisis. Matt Yglesias recently summarized the differences between Mitt Romney’s proposed approach and the approach embedded in ARRA:

Romney supported large permanent tax cuts, big increases in defense spending, a modest boost in infrastructure, and perhaps a small amount of state and local fiscal aid, all paired with big cuts to Social Security and Medicare. Obama proposed large temporary tax cuts, modest increases in defense spending, a big boost in infrastructure spending, a large dose of state and local fiscal aid, and no cuts to Social Security and Medicare. These are very different policies and they reflect different philosophies.

I was reminded of this as I read Martin Feldstein’s take on fiscal stimulus:

As for the “stimulus” package, both its size and structure were inadequate to offset the enormous decline in aggregate demand. The fall in household wealth by the end of 2008 reduced the annual level of consumer spending by more than $500 billion. The drop in home building subtracted another $200 billion from GDP. The total GDP shortfall was therefore more than $700 billion. The Obama stimulus package that started at less than $300 billion in 2009 and reached a maximum of $400 billion in 2010 wouldn’t have been big enough to fill the $700 billion annual GDP gap even if every dollar of the stimulus raised GDP by a dollar.
In fact, each dollar of extra deficit added much less than a dollar to GDP. Experience shows that the most cost-effective form of temporary fiscal stimulus is direct government spending. The most obvious way to achieve that in 2009 was to repair and replace the military equipment used in Iraq and Afghanistan that would otherwise have to be done in the future. But the Obama stimulus had nothing for the Defense Department. Instead, President Obama allowed the Democratic leadership in Congress to design a hodgepodge package of transfers to state and local governments, increased transfers to individuals, temporary tax cuts for lower-income taxpayers, etc. So we got a bigger deficit without economic growth.

I tend to think that conservatives were too fixated on the size of the 2009 fiscal stimulus law rather than it’s composition and the fact that it wasn’t tightly linked to long-term spending reductions. The Bipartisan Policy Center’s Debt Reduction Task Force married short-term stimulus with a credible long-term plan for fiscal consolidation that has many elements that should appeal to fiscal conservatives.

I am broadly sympathetic to the Romney-Feldstein approach. I’d definitely believe that state and local aid should have been conditional, as in Nicole Gelinas’s “cash-for-cuts” proposal:

Congress should offer a carrot: $200 billion now — for more than $200 billion in public — sector savings and investment later.
To get the cash, state and local governments would address the first half of the imbalance: out-of-control public labor costs. They could commit to wage freezes and asking public workers to pay more for health care, where savings will compound.
More important, states can revamp public-worker benefits for the newly hired. Public employers should close the generous pension plans that allow workers to retire in their 40s and 50s with a guaranteed lifetime income. New public-safety and physical-labor workers should work longer before retiring, and new civilian workers should contribute to private-sector-style 401(k) plans.
These changes would require governors and legislators to change laws and negotiate with unions. But asking for such things doesn’t infringe on state sovereignty. If states balk, they can leave the money for their neighbors — a choice that the “race to the top” education program last year offered, too.
For participating states: Each state could bring a contractual savings commitment to the feds. The feds would use the new stimulus cash pot to reward each state for its committed savings — with a bigger percentage going to states that demonstrate that they’ll save more relative to how much they spend.

“Cash-for-cuts” is premised on the view that state and local spending is bloated, that cost growth is higher than necessary to deliver high-quality public services, and that high public sector compensation levels are not an intrinsically good thing, a view I share. This was not the spirit that animated the coalition behind the 2009 stimulus law.