Preferred fiscal policy

I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax... Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.

That's Greg Mankiw discussing his preferred fiscal policy. Payroll taxes are just like cigarette taxes. If you want more of something subsidize it. If you want less of something tax it. Payroll roll taxes drive a wedge into the labor market, creating a difference between what firms pay for labor and what workers receive.

Here is John Maynard Keynes writing in 1942...

I am converted to your proposal…for varying rates of contributions in good and bad times.
(June 16, 1942). Keynes, Collected Writings, vol. 27, p. 208.…[Y]ou are able to show fluctuations in income of an order of magnitude which is significant in the context… So far as employees are concerned, reductions in contributions are more likely to lead to increased expenditure as compared with saving than a reductionin income tax would, and are free from the objection to a reduction in income tax that the wealthier classes would benefit disproportionately. At the same time, the reduction to employers, operating as a mitigation of the costs of production, will come in particularly helpfully in bad times.

Translation: a lower payroll tax will decrease their cost of labor and stimulate hiring.

James Hamilton on the fiscal stimulus...

I do not accept the proposition that there is a level of government spending-- however large a number you choose to suggest-- that will prevent the unemployment rate from rising above 8%. But I do believe that if the government borrows a sufficiently large amount, we will have to worry in a very concrete way about what will sustain the foreign demand for U.S. assets.

Well rising above 8% is not that big of a deal. We're almost there now. We should expect some stimulus, some positive shock to GDP... if I borrow a couple truckloads of money I can enhance my well-being in the short term. In the longer term we should expect the fiscal stimulus to lower the rate of growth as interest rates rise. Even the CBO has said that. Of course we can print money - the Fed can monetize the debt. That will lead to inflation. If you're a homeowner that's not all bad of course. Inflation, rising prices and wages, reduces the real value of debt.