Are deficit reduction and job creation mutually exclusive?
Stimulus now, coupled with a medium to long-term deficit plan, will spur job creation and cap the potential increase in interest rates.
Today the Obama Administration is announcing a very small effort to reduce (only “unnecessary and wasteful”) deficit spending, and yet liberal groups will attack them for promoting a policy that will kill the economy–or at least prolong the recession. And conservatives will continue to argue that any spending done in the name of “stimulus” is by definition “wasteful”–especially if they don’t get how a less-idle economy might at all benefit themselves personally.
But it’s possible to argue for more and better stimulus at the same time that you call for greater fiscal responsibility. Two prime examples, from two of my favorite “fiscal hawks” who can walk and chew gum at the same time…
Robert Bixby, the executive director of the Concord Coalition, is at the forefront of the effort to publicize the dangers of uncontrolled federal spending. But even he worries that the economy is not yet at a point where it makes sense to forgo extending unemployment benefits and certain other federal supports, as long as they are carefully targeted at preventing layoffs that would exacerbate the economic downturn.
“Right now, I think that there’s still a case to be made for some aid to the states if it is a pretty direct form of injecting stimulus,” Bixby said last week.
The need to rein in deficits and the national debt should not be confused with near-term problems such as the current unemployment rate, Bixby said: “There’s no question that we do have to turn our attention to fiscal consolidation, because we’re on an unsustainable track. That unsustainable track has nothing to do with the short-term economy.”
President Obama echoed Bixby in a speech last week on the economy at Carnegie Mellon University in Pittsburgh. “Now, the economy is still fragile, so we can’t put on the brakes too quickly,” he said. “We have to do what it takes to ensure a strong recovery. A growing economy will unquestionably improve our fiscal health, as will the steps we take in the short-term to put Americans back to work.”
So we want the economy to recover today. But we can’t run a deficit equal to 50 percent of government spending forever. How do you balance these goals: short-term stimulus and long-term balance?
What I like to say is that right now, the economy is more important than the budget. We need to stimulate in the short term and get order in the long term. Those aren’t tradeoffs. If you just stimulate now, then you create worries about the long-term situation and it creates investor uncertainty [which puts upward pressure on interest rates]. If you just do fiscal discipline now, you help the budget but hurt the economy, and then that hurts the budget again [lower production means lost tax revenue]. But, if you stimulate now, coupled with medium to long-term deficit plan, you cap that potential increase in interest rates.
Critics from both extremes basically believe that achieving both goals (short-term stimulus and longer-term fiscal responsibility) isn’t possible, or that greater success at one means failure with the other. So they only push for their favored goal, and with their hyperpartisan rhetoric they dismiss the other goal as stupid and evil. And the rhetoric works with many Americans–and as a result, we risk screwing up on both goals. We neither walk nor chew gum.
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