Tax Analysts Blog

Stimulus to Cure the Deficit? Talk About the Audacity of Hope

Posted on Dec 9, 2009

Because Congress will have months to reject and rework Obama's latest job creation proposals, the details of his speech yesterday don't matter. The central point is that Obama has signaled his willingness to grant Congressional Democrats their fond wish for a jobs bill in 2010. On top of that he will let them use repaid TARP funds as a revolving line of credit. Overall, his tone on fiscal policy was troubling. And the following lines from the speech hit me like a thunderbolt:

    Now, there are those who claim we have to choose between paying down our deficits on the one hand, and investing in job creation and economic growth on the other. This is a false choice. Ensuring that economic growth and job creation are strong and sustained is critical to ensuring that we are increasing revenues and decreasing spending on things like unemployment insurance so that our deficits will start coming down. 
Treasury Secretary Geithner (quoted in the December 8 Washington Post) also recently linked job creation to deficit reduction:
    Right now it's all about growth and jobs, has to be about growth and jobs. And that's the best way to make sure we have the ability to shift to going back to living within our means, bringing down these long-term deficits. That's the basic strategy.

Stimulus (or whatever you want to call it) is probably a very good idea right now. But don't try conning us into believing it will help reduce the deficit. Deficit reduction and job creation are not a "false choice."

This type of talk is an unwelcome development. The Obama administration is clearly easing up on its commitment to deficit reduction with the oldest line in the politicians' fiscal playbook: If you let us give out more goodies everything will get better, including the deficit. This is the tack Reagan chose in 1981. Great politics, lousy economics -- resulting in larger deficits. In Germany right now the conservative coalition headed by Chancellor Angela Merkel is using this line of reasoning to justify a controversial plan for tax cuts. And in the UK the odds-on favorite to be the next Prime Minister, David Cameron, is talking about "going for growth" as a way out of Britain's huge fiscal mess. For all these sunshine politicians I can only say this: if stimulus creates jobs and reduces the deficit, why not take your plans and double them?

It is true that it is possible that spending increases and/or tax cuts could reduce the deficit but this would require implausibly larger multipliers. In a supply-side framework, it would require implausibly large positive responses of saving and investment to tax cuts. But this mere possibility is too tempting for most politicians to resist. And they can always find some politically sympathetic economists to go along.

Read Comments (0)

Submit comment

Tax Analysts reserves the right to approve or reject any comments received here. Only comments of a substantive nature will be posted online.

By submitting this form, you accept our privacy policy.

* REQUIRED FIELD

All views expressed on these blogs are those of their individual authors and do not necessarily represent the views of Tax Analysts. Further, Tax Analysts makes no representation concerning the views expressed and does not guarantee the source, originality, accuracy, completeness or reliability of any statement, fact, information, data, finding, interpretation, or opinion presented. Tax Analysts particularly makes no representation concerning anything found on external links connected to this site.