Wish List for Stimulus 3.0

In a slow summer week, talk of a third stimulus is beginning to make the rounds, especially after dismal unemployment numbers and a dose of reality from some of President Obama’s advisers. Just don’t call it “stimulus” – voters are not excited about any more spending.

Most of the money from Stimulus 2.0 will actually be spent in fiscal year 2010, but even with that extra jolt to the economy, recovery won’t come quickly, says Paul Krugman. What should be included in Stimulus 3.0? Here are some ideas:

- Extend unemployment benefits.   
    Politically, this is one of the easiest. Unemployment will be one of the last symptoms to improve as the economy gets back on track. This will also help state budgets, which are struggling mightily to make ends meet. (Most aren’t allowed to run a deficit.)

- Hire – or re-hire – more teachers.
    If Education Secretary Arne Duncan doesn’t have a good proposal, or the political will, to re-do No Child Left Behind, the least Congress can do is create jobs and begin to improve our failing education system. This time, states should be required to add the money to their existing education budgets, not use it to replace other funding.

- Offer prizes for better batteries; cheap, clean electricity; and other technologies.
    Because of political compromises, government regulation of fuel economy and carbon emissions has not been nearly enough to make extensive R&D economically feasible in the short term. The technology won’t pay off until many years into the future, when it’s cheaper than conventional fuels or emissions levels. But we need better hybrid-car batteries and cheap, clean electricity now.
    A $300 million prize rather than R&D funding would attract additional private capital and only pay out for success. The rules would make or break the contest, but if they were written carefully (by experts, not politicians), a high-stakes contest could push the technological frontier.

Another idea, proposed by liberal luminaries like James Galbraith and Dean Baker, is a payroll tax holiday, or, better yet, extra vacation time paid for by the government.This isn't a bad idea, but it won't have as large an effect on economic growth as other forms of stimulus. Also, Baker's plan - fewer hours worked by current employees will yield more employees hired in total - is too clean-cut. He presumes, as an economist, that the labor market always clears. But companies may keep extra employees around, even in a downturn, because of the cost of re-hiring. And hiring decisions always depend on expectations of future economic growth, so if companies don't see a big rebound ahead, they may not take on new workers.

Especially if “the green shoots are dead,” we will need a political stimulus to spur an economic one. Democrats have to get the message across that rising unemployment is a result of too little stimulus, not too much. If done smartly, the third time’s the charm.