[Ed. note: As we are surely going to be talking about the economy a lot, this piece is promoted for more discussion.]

As already noted by David Dayen, things have been moving fairly quickly today on how the Obama Administration will address the economy as we embark on the final two months leading up to the November elections. First, Dayen noted that John McCain has been given an elevated platform once again, from which he is pushing for extending the Bush tax cuts for the rich. Shortly thereafter, Dayen found that Obama appears to have abandoned the idea of a large payroll tax holiday, but will instead roll out a plan for a very modest infrastructure building program.

As a guide to evaluating the ideas and plans that will be tossed about in the next few weeks, it is informative to go back to the time of the original Obama stimulus plan. Paul Krugman provided a very brief but penetrating analysis of the plan as it was nearing its final form. Here is the outcome of Krugman’s analysis:

Suppose that we’re looking at an economy that, absent stimulus, would have an average unemployment rate of 9 percent over the next two years; this plan would cut that to 7.3 percent, which would be a help but could easily be spun by critics as a failure.

/snip/

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

Note that Krugman published this analysis on January 6, 2009. He used as a basis for his calculations a stimulus package totaling $775 billion, with $300 billion in tax cuts. The final plan, passed in mid-February, 2009 was $787 billion, with $264 billion in tax cuts, remarkably close to the scenario Krugman chose. . . .

A key part of Krugman’s analysis relied on making calculations on the "stimulative" effect of various government actions. He linked to the table below as part of the analysis:

Note that this table tells us that tax breaks are horribly inefficient at stimulating the economy when compared to spending. What is even more striking is that this table is from an analysis from economist Mark Zandi, who seems to work for both Democrats and Republicans.

Of course, Krugman was right. The economy was even worse than Krugman assumed in his analysis, however, and the stimulus which he saw as inadequate for the conditions he envisioned was pitifully short of adequate for the economic reality that ensued. With unemployment now in double digits, the cries that "government spending doesn’t work" are echoing all over Washington, when, as Krugman’s analysis shows,  the cries should be that government spending wasn’t enough to dig the economy out of the ditch into which it had been driven.

With that as background, the current chatter in the Beltway is truly maddening. McCain, who was thoroughly beaten in the 2008 election in part because his economic policies were seen as too tied to the policies that produced the financial meltdown, now is calling for Bush’s tax cuts to be made permanent. Making the Bush tax cuts permanent has the pitiful stimulative factor of 0.29 in Zandi’s table. Inexplicably, the economist who is the "go to" source for why tax cuts are bad public policy when trying to stimulate the economy and who worked for McCain during that campaign, but now works for Democrats,  is pushing tax cuts, apparently against his own advice. Note, however, that unlike McCain, who wants to make the cuts permanent, Zandi is advocating extending them a year or two.

That makes today’s announcement that Obama is backing off the prospect of hundreds of billions of dollars worth of payroll tax holiday appear to be good news. However, when we look at Zandi’s table, we see that payroll tax holidays have a stimulative effect of 1.29, so it is the "least bad" of tax cuts. With the $100 billion in R&D tax credits Obama is now proposing in its stead, the stimulative factor drops (that particular tax is hard to place into Zandi’s table, but likely would fall close to the value of 1.03 seen for across the board tax cuts).

Finally, Obama’s pitiful $30 billion (or is it $50 billion?) offered as infrastructure spending is a ridiculous move if it is meant to be evidence that he is attempting to do anything to stimulate the economy. Such spending would need to be higher by at least a factor of ten before it begins to even be worth putting into a Krugman-style analysis for its possible effect on reducing unemployment. Recall that in the previous analysis, Krugman worked from the assumption that it takes $300 billion of GDP growth in a year to reduce unemployment by 1%. If this "plan" is the best that the Obama economic team of geniuses can produce, Democrats don’t need to bother showing up for the 2010 or 2012 elections.