Here’s Greg Mankiw’s preferred fiscal stimulus plan.

I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.

I recognize that some state governments are now struggling in light of the macroeconomic crisis. For the next two years, I would let each state governor have the authority to divert a portion of the payroll tax cut in his or her state and take the funds instead as state aid.

Would the equal present value of the payroll tax cut and the gas tax increase be discounted by consumers, who would save in anticipation of the effects of the future increase, resulting in no stimulus to aggregate demand from the policy?  I doubt it; I think it would have some Keynesian multiplier effect nonetheless.  But much of it may be saved, in the form of paying down debt.  It does also give a straightforward reduction in the cost of keeping people employed, a microeconomic incentive effect that might prove to have positive macroeconomic consequences in the present situation.  I still tend to think government spending will, as the simplest Econ 1 Keynesian theory suggests, have a bigger multiplier (a point Greg does explicitly address---he thinks the empirical evidence, though not conclusive, casts some doubt on this).

I’d be most concerned, though, with what would happen to the programs normally funded by payroll taxes:  Social Security and Medicare.  Social Security in particular is at least nominally supported by paying payroll tax receipts into a fund reserved for Social Security payouts to retirees;  would the program continue to pay out at current rates, now funded by general revenues or the gasoline tax?  That might not be such a bad idea, but I’m not sure it’s what Mankiw has in mind….

Note that even if the increased-state-spending-for-payroll-tax-cut exchange would be macroeconomically benefical globally, it might have some negative micro effects if only a few states adopted it, as it would put them at some competitive disadvantage for jobs.