What wastes money in stimulus?

The Obama administration has dropped the idea of a payroll-tax holiday. They're interested in making the R&D tax credit permanent, but that's more of an effort to aid long-term innovation than short-term growth. The Bush tax cuts are going to be the major tax issue going into the fall, but that's only because they're expiring and that's forcing Congress to do something (or decide to do nothing), not because anyone really thinks they're a great stimulus measure.

It's worth saying why this is. Our definition of waste in government spending is something like "a project that doesn't seem worthwhile to me." When Tom Coburn and John McCain released their list of wasteful stimulus projects, the first item was "$554,763 for the Forest Service to replace windows in a closed visitor center at Mount St. Helens." Assuming the description is right, it seems dumb, right? Why does a closed service center need new windows?

But from the point of view of stimulus, that project wasn't wasteful at all: We paid people to replace windows, we paid window-makers to produce glass, and we put $554,763 of new demand into an economy that was operating far below its potential. Here's what would be wasteful: Giving me a payroll-tax cut. Or, as the Bush tax cuts would have it, a break on my income taxes.

I'm a young, single worker. I don't have many expenses. I'm currently saving money. If given a tax cut, I will save every cent of it. My tax cut will create no new demand in the economy. It will not employ new workers or buy new things. I will, in other words, waste the entire thing. If you want to create jobs and stimulate economic activity, you'd be much better off hiring people to replace the windows in a vacant storefront than giving me a tax cut.