August 30, 2014

What Disagreement on the Need for Stimulus?

Congress has been developing a stimulus plan in recent weeks which it hopes will provide a much needed boost to the ailing economy. There has been a tendency to pin those supporting a large stimulus plan against those individuals deemed to be “deficits hawks.”

There are two points to make about this discussion. First, such a characterization assumes there are currently “deficit hawks” who are standing in the way of economic stimulus because of their concern for the short-term deficit--an assumption I consider dubious and at the very least is not an accurate description that people could make of The Concord Coalition based on our recent media interviews or policy briefs.

The second point is that setting up positions in this “debate” implies that short-term stimulus and long-term fiscal responsibility are contradictory goals. They are not, and we have attempted to make that clear.

In our most recent issue brief, we highlighted the important roles of short-term stimulus aimed at increasing aggregate demand in the interim and budgeting rules (like PAYGO) aimed at improving our longer-term future. These two problems should not be treated the same:

“A key distinction must be drawn between short-term and long-term goals. Policy makers are facing three distinct problems: (1) an economic downturn; (2) a financial sector crisis; and (3) the long-term unsustainablity of current fiscal policy. While there are linkages among these issues -- most specifically the debt increase all three portend -- they represent different ailments and should be treated with different remedies. The Obama Administration will need to calibrate fiscal policy to accommodate these differences. Short-term stimulus need not and should not increase the long-term structural deficit, just as reducing the long-term structural deficit need not and should not impede economic recovery.”

Harvard economist Greg Mankiw wrote something similar in a column for the New York Times last week:

“Calls for increased infrastructure spending fit well with Keynesian theory. In principle, every dollar spent by the government could cause national income to increase by more than a dollar if it leads to a more vibrant economy and stimulates spending by consumers and companies. By all reports, that is precisely the plan that the incoming Obama administration has in mind.

The fly in the ointment — or perhaps it is more an elephant — is the long-term fiscal picture. Increased government spending may be a good short-run fix, but it would add to the budget deficit. The baby boomers are now starting to retire and claim Social Security and Medicare benefits. Any increase in the national debt will make fulfilling those unfunded promises harder in coming years.”

Mankiw is not disagreeing with increased government spending aimed at stimulating the economy. Rather, it appears to be an acknowledgement that we need to have a targeted stimulus utilizing those policies that provide the greatest economic feedback (not an "all of the above" approach) as well as an added emphasis on fiscal responsibility once this crisis is resolved.

The same can be said for Nobel-laureate economist Paul Krugman whose recent New York Times column notes that:

“the best course of action, both for today’s workers and for their children, is to do whatever it takes to get this economy on the road to recovery.” 

Obviously, Krugman is speaking to today’s economic crisis, but he is not encouraging policymakers to abandon fiscal restraint, as he clearly recognizes the economic consequences of running structural budget deficits: 

“The claim that budget deficits make the economy poorer in the long run is based on the belief that government borrowing “crowds out” private investment — that the government, by issuing lots of debt, drives up interest rates, which makes businesses unwilling to spend on new plant and equipment, and that this in turn reduces the economy’s long-run rate of growth. Under normal circumstances there’s a lot to this argument.”

Furthermore, Robert Samuelson in the Washington Post added to this discussion by indicating that setting economic and budget priorities should be President-elect Obama’s most important goal—jumpstarting the economy first followed by a reevaluation of our fiscal outlook and a plan to bring it back onto a sustainable path:

“The country does need to face its health and energy problems as well as deficit-ridden federal budgets. But trying to do too much too soon risks doing none of it well. We -- and he [Obama] -- are caught up in a web of contradictions. In the long run, we need to discipline our appetite for health care and energy; we need to reconcile our desire for government benefits and our willingness to be taxed. Obama's first job is to avert an economic freefall.”

Based on reviewing recent media coverage, one might get the sense that all three of these columnists are vehemently disagreeing with each other over the issue of stimulus spending and the deficit. In actuality, there seems to be a lot of common ground on the basic issues, and The Concord Coalition agrees with much of what should be seen as an emerging consensus.

President-elect Obama and Congress have indicated they will make stimulus the first item on their agenda. Discussion of stimulus, however, does not inherently mean disregarding the need to address our long-term budget outlook or abandoning the broader goal of “fiscal responsibility.”

--Jonathan DeWald, Communications Director