Economist Advocates Expansionary Debt Relief Plan

Rober Shiller is convinced that a plan requiring raising taxes and government spending on a one-for-one basis – a “balanced-budget multiplier” – will help stimulate the economy and reduce the deficit without endangering the possibility of economic recovery. Shiller argues this will help solve real problems like high unemployment without necessarily expanding the size of the government, if spending is focused on infrastructure projects and funding private-sector projects. He also skewers ratings agencies for making the problem worse by promising to downgrade the country’s credit rating if it doesn’t figure out how to trim trillions from the deficit while also avoiding another recession – what many analysts now see as impossible. For more on this continue reading the following article from Economist’s View.

Robert Shiller:

Taxing and Spending, in Balance, by Robert Shiller, Commentary, NY Times: The fight over the debt ceiling has deflected attention from the serious problems of fixing the economy and finding jobs for the 14 million unemployed. Worse, it has created strong negative feelings about fiscal policy, just when other policy measures seem incapable of restoring economic health.

The very term “fiscal stimulus” has become tainted. ... Fiscal stimulus is actually very useful and appropriate in the current circumstances. But rather than despair, we should ... never give up proposing sensible economic policies. ...

In December, I wrote about the concept of the balanced-budget multiplier and of raising taxes and government expenditure by the same amount, dollar for dollar..., such a policy would be one-for-one expansionary...

This is an expansionary change in fiscal policy that won’t require additional increases in the national debt. We should start a dialogue right now about taking such action, before the damage of protracted unemployment worsens. ...

Such a policy needn’t make government substantially bigger. Instead, the government would act as a kind of investment banker specializing in public goods. It wouldn’t need a lot of employees itself. It would seek private-sector proposals for building infrastructure and other useful projects, and bring in private-sector panels to review them. This would be akin to the role government already plays for science with the National Science Foundation. ...

Current trends suggest that we may be dealing with high unemployment for years. We should be prepared to provide balanced support to the economy.

I appreciate the sentiment that "we should ... never give up proposing sensible economic policies." We should certainly do our best to educate people and to fight for better policy. But there's no way a policy that involves a substantial increase in taxes will pass right now.

But do I have something better to offer that might pass? Nope -- "might pass" and "better" are non-intersecting sets, and that won't change before the debt ceiling deadline. My effort right now is directed toward avoiding the stupidity that might lead to a failure to raise the debt ceiling, or almost as bad, a deal that raises it stupidly (I avoid using the word stupid here for the most part so that when I do use it, it will have more force).

In that respect, I am annoyed at the (demonstrably incompetent) ratings agencies, S&P in particular. They are now saying that simply raising the debt ceiling is no longer enough, there must be trillions in deficit reduction -- enough to derail the recovery and potentially send the economy back into recession -- to avoid a ratings downgrade. So S&P is making it more likely that a recovery killing deal will be made, and less likely that there is a last minute deal that "cleanly" raises the debt limit, avoids the recession risk associated with immediate debt reduction, and also avoids the risk of the severe economic problems associated with default. [Update: see here too, and here.]

This blog post was republished with permission from Mark Thoma.