Spend or cut to boost economy? US can do both. Smartly.
Deficit-cutting 'super committee' and Obama jobs plan don't have to work at cross purposes.
Talk about working at cross purposes. Just as Congress's so-called super committee was gearing up to find ways to cut spending and increase revenues by some $1.5 trillion over the next 10 years, the Obama administration announced plans to boost jobs by doing the opposite: raising spending and cutting taxes.
Many policymakers and experts characterize this as long-term versus short-term policy and argue that the short-term spending rise needs to take priority right now.
Actually, both can be pursued at the same time, if Washington is willing to put in place policies that have been proven to work and cut those programs that are less effective.
For the short term, stimulus policies should adhere to the three T's that President Obama's former economic adviser Larry Summers first espoused: timely, well-targeted, and temporary. That means policies that as quickly as possible put more money in the hands of the households most likely to immediately spend the money on goods and services, and the businesses most likely to hire more workers.
For job creation and reduced unemployment in this purely short-term sense, the jobs can be limited-time jobs, like construction work for infrastructure projects, moving forward consumer demand or business hiring that would otherwise have occurred later or not at all. Transfers to cash-strapped state and local governments and small businesses can help create net jobs by simply preventing jobs from being lost.
The key is that such moves be temporary. The policies should come with clear deadlines or a "while supplies last" feel – such as the "cash for clunkers" program from a couple of years ago – to encourage an immediate response.
The higher deficits to fund these limited-time jobs should also be limited-time deficits. These short-term recovery moves are not an argument for permanent deficit spending. And we should replace policies that have not proved successful in increasing demand with policies that have immediate and high "bang per buck" before we increase overall deficit spending.
Over the longer term, deficit reduction can encourage economic growth via higher national saving, while freeing up resources to go to the most productive areas of our economy. Then, instead of having a rising share of resources going toward interest on the national debt or other forms of government spending that provide no public benefits, more funds will get steered toward areas of government spending that our society values highly.
So the super committee should recommend a "grander" solution than the $1.5 trillion in cuts over 10 years. They should look to policy changes that can achieve economically sustainable deficits no larger than the expected growth rate of the economy (about 2 to 3 percent of the United States gross domestic product). Ultimately this will require fundamental reform of entitlement programs and the tax system, ideally in ways that don't just reduce the deficit but also encourage labor supply and saving by reducing the distortions that policies impose on economic decisions.
It's hard to imagine the super committee coming up with all of that in the few months that they have. But a good yet easy start would be to make a firm commitment to strict pay-as-you-go rules on both tax cuts and spending going forward.
Despite the many challenges facing the US economy, confronting them through better fiscal policy is not as hard as it might seem.