Tax Analysts Blog

Going in Circles on the Deficit

Posted on Oct 20, 2009

On a twin-screw powerboat you can spin your vessel endlessly around its pivot point by putting one engine in forward and the other in reverse. You get nowhere and you look ridiculous.

Unfortunately America's fiscal policy has one engine in forward and one in reverse. We want to increase the deficit to provide fiscal stimulus. At the same time we want to reduce the deficit to prevent national bankruptcy. And we are getting nowhere.

On NBC's Meet the Press this Sunday White House advisor Valerie Jarrett perfectly summed up the nation's directionless policy: "Here is this conundrum:  You've got this huge national deficit, and we've got to do what we can to bring that down, at the same time as it's important to stimulate the economy.  And the federal government has to do its part.  That's why the recovery bill was so important, that's why many of the measures that the Treasury Department has taken since then, whether for housing or small business, are all very important in stimulating the economy.  So let's wait and see."

So Ms. Jarrett, a simple question for you and America's economic A-Team: Should we proceed with deficit reduction or its polar opposite, economic stimulus? They are mutually exclusive. You cannot do both. So what's it going to be?

It is a nonnegotiable priority for politicians to show that they care about unemployment. But it is not necessary for them to put in place policies that actually reduce unemployment. The reason: nobody can really prove or disprove that your policies work because we never will know what would have happened in their absence. The current debate about the effectiveness of the "first" stimulus, the American Recovery and Reinvestment Act passed in February, is a perfect example. Republicans say it didn't work and Democrats say it did. (Most economists, citing the most basic principles of Keynesian economics, would have to agree with the Democrats.) But nobody can really prove anything. So Democrats have cover if anybody says they didn't care.

Now with unemployment approaching 10 percent in an election year, Democrats must again show they care. But rising anxiety over rising national debt and declining anxiety over economic collapse gives them much less room to maneuver. What we are likely to see in the coming months is a repeat of the Clinton 1993 job-creation political strategy: Low or no-cost policies--like targeted, temporary tax cuts--that can get a lot of press attention but are unlikely to have any real impact on job creation.

In his column on Sunday, George Will had no hard evidence to back the usual conservative claim that the February $787 billion stimulus didn't work. But he was right to point out that job creation proposals in the works are nothing more than window dressing.

While jobs policies may be all fluff, plans for deficit reduction are hard reality that will really shape our future. How will we pay for health care reform? For the war in Afghanistan? For the retirement of the Baby Boom generation? For the bailout needed to solve the next financial crisis? It is unavoidable that politicians will obsess about jobs over the next year while in fact doing nothing about them. But what we really need to do is go full throttle on deficit reduction. Articles in today's Wall Street Journal and The Hill discuss some efforts to start us moving in that direction.

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