Setting foot on the trail blazed by the Chamber of Commerce, the Heritage Foundation and the Club for Growth, the Republican Study Committee (RSC) released its economic stimulus plan today. Dubbed The Economic Recovery and Middle-Class Tax Relief Act of 2009, the plan includes:

- Making the 15 percent capital gains tax rate permanent.

- Cutting the top corporate tax rate from 35 percent to 25 percent.

- A 5 percent across the board income tax cut for individuals.

- Indexing the capital gains tax for inflation.

The RSC also proposes “a 1 percent reduction in discretionary spending in the fiscal 2009 budget,” proudly touting the fact that “this legislation does not contain one penny of new spending, and rejects the idea that massive new government spending will lead to an economic recovery.”

As stimulus outlines go, this is spectacularly bad. It couples the ineffective tax cuts of previous proposals with a completely destructive spending reduction that would only exacerbate the economic crisis.

As Paul Krugman noted, “with both consumer spending and business investment plunging, a huge gap is opening up between what the U.S. economy can produce and what it’s able to sell.” The whole point of a stimulus package is to fill this gap by boosting demand and consumer spending, which will get dollars to flow through the economy again. This is accomplished through targeted tax cuts to low- and middle-income families, infrastructure investment, and by providing aid to state governments.

As Matthew Yglesias wrote, “Not only is this barrel full of tax cuts proposed by the [RSC] pretty bad stimulus, but to even call a package of permanent tax cuts an ‘alternative stimulus’ is a serious abuse of the term”:

The idea of a stimulus measure is that you increase the budget deficit over the short-term to try to get the economy back to something like a full employment of available resources. But a permanent increase in the deficit extends, by definition, into non-recessionary periods in which such deficits operate as a drag on growth.

Indeed, permanently cutting taxes for the wealthy and corporations — who are less apt to immediately spend any tax break they receive — while forcing the federal government, in Neo-Hoover fashion, to cut its budget is a counterintuitive response that is not really a stimulus at all. What the economy needs is a boost, not a permanent break for businesses and the rich.

According to the New York Times, the proposed $800 billion economic recovery plan is taking shape in Congress and is “on track for passage by mid-February.” Yesterday, The Wonk Room noted that education has surfaced as a “favorite channel” for stimulus dollars.

Today, another specific channel emerged: aid to state and local governments. The Wall Street Journal reported that under the proposed stimulus plan, “state and local governments would benefit from more than $160 billion in federal aid.” This aid would come in the form of about $80 billion for a new “education stabilization fund” and an additional $87 billion that would be directed toward bolstering Medicaid.

Providing states with funds to shore up their crippled budgets is one of the most important avenues down which stimulus aid could go. At least 44 states are facing budget shortfalls, which are already forcing them to make wide cuts in health care and education. For instance:

- South Carolina has cut treatment for low-income women under 40 with breast or cervical cancer and stopped providing nutritional supplements for people with kidney failure.

- The Los Angeles school board voted yesterday to lay off 2,300 teachers if no remedy to the budget crisis is found.

- In Nevada, cancer patients without health coverage no longer have a place to get chemotherapy after the state’s largest public hospital stopped providing services.

School boards in Memphis and Dallas have also announced mid-term teacher layoffs, while Utah is “looking at cutting public health programs and eliminating coverage for about 20,000 low-income people who rely on the state-funded Utah Primary Care Network.”

Beyond the human angle of wanting to preserve our public education and health care systems, there are good economic reasons for sending aid to states. Cuts in public programs and payrolls means fewer dollars moving through the economy, and more people collecting unemployment benefits who would otherwise be spending their own money. As Mark Zandi of Moody’s Economy.com wrote, allowing the states’ respective budget shortfalls to remain unchanged is “sure to become a substantial drag on the economy” through 2009:

Additional federal aid to state governments will fund existing payrolls and programs; thus it will also provide a relatively quick economic boost. States that receive a check from the federal government will quickly pass on the money to workers, vendors, and program beneficiaries.

Another key here is “quickly.” An effective stimulus provides a short-term boost with money that moves into the economy immediately. Since states are already making severe cuts, they literally have no alternative to turning the money right back around and spending it, simultaneously providing the necessary economic kickstart and ensuring that critical human services continue.