I watched the Fareed Zakaria GPS show this morning. Paul Krugman argued that the U.S. economy needs more federal stimulus to help increase economic growth and reduce unemployment. Niall Ferguson, a Harvard history and business school professor and Hoover Institution fellow, argued that the priority today is to reduce high federal debt levels that could lead to high interest rates, inflation and lower long-term growth.
At the end of the show Fareed Zakaria suggested that we should do both by enacting additional stimulus now and, at the same time, taking steps to reduce future deficits. The stimulus would help the short-term problem of insufficient demand i.e. not enough customers to support full employment. A firm agreement to reduce future deficits would give investors around the world confidence that the U.S. was serious about the federal deficit. That agreement would include reductions in future Medicare and Social Security benefits, elimination of some federal subsidy programs such as agriculture and some additional taxesZakaria suggested a gas tax and small national sales tax.
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I agree with Zakaria that stimulus versus deficit reduction (so-called austerity) is a false choice. It is a "both and" not an "either or".
Later today I read this week's Economist magazinethe British economic and financial weekly. The headline is "Both sides in the stimulus v austerity exaggerate, but the austerity lobby is the more dangerous".
The article points out that politics is preventing the sensible policy of an additional temporary stimulus while at the same time giving no inducement to tackle the sources of long-term fiscal deficits and rising debt.
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Take the debate in Congress about an extension of unemployment benefits and additional aid to prevent layoffs of teachers and public safety workers. The idea that preventing this spending has any connection to the nation's long-term deficit challenge is silly, hypocritical and callous.
The false choice is silly because whether we spend an extra $100 billion or $200 billion in stimulus for one more year has virtually no impact on the long-term deficit arithmetic or policy challenge but it could have an impact on how fast the economy recovers, the level of public services and how people caught in long-term unemployment through no fault of their own fare during the next year, which is certain to see at best a slow recovery.
The false choice is hypocritical on the part of Republicans for several reason1) they would support tax cuts in a heartbeat if that were the proposed stimulus program despite the lack of any evidence that tax cuts are the best anti-recession policy and 2) Republicans supported a broad round of "Bush tax cuts" (unaccompanied by spending cuts that led to rising deficits followed by supporting a large Medicare drug benefit )not paid for in any way) that will contribute far more than an extra year of stimulus spending to our long-term deficit.
The false choice is callous because it does not arise out of any theory or conviction but only out of political expediency. It is certainly possible that Democrats would act similarly on an issue were the situations reversed but that only underscores on this July 4th celebration how far we are from coming together as a people.
The economy still needs help and the long-term deficit challenge demands immediate attention and the associated pain of living more responsibly. Both challenges are serious threats to our economy and deserve better from our leaders than political jockeying.
We can and should act boldly on both the short-term and long-term challenge and do both quickly.