Friday, December 26, 2008

State of the Union

This post by Mark Thoma (econ, U Oregon) reflects the typical thinking in academic econ:
Keeping the budget in balance while the economy is struggling is not good policy. If the goal is to stimulate the economy and to create new jobs, then the "clear" lesson - the advice to pay for the spending on infrastructure by raising taxes - is wrong. The new infrastructure does need to be paid for, but the time to do that is when the economy is healthy, not when it is under performing.
The "clear" lesson is, when the private sector deleverages, to maintain money supply, the Federal Government has to leverage up by running a larger deficit. In some ways, you can think of this as reversing the disintermediation between money creation (Fed) and money allocation (banks). You only want to run down the deficit if you have inflation which you want to reduce.

Note that the goal here is to increase the Federal deficit to increase money supply. Picking winners and losers via how that new money is allocated is an entirely different lesson. If you use it to prop up zombie industries (AIG, Bear Stearns, Citi, the entire financial sector, GM, Chrysler etc.) then you get no new productive capacity for this allocation. If you spend it on uselessness (infrastructure in 2008 means bridges to nowhere) then construction workers get rich, but no one else). The best, fastest way to distribute this money into the economy is to announce a payroll tax holiday that will continue until CPI starts to tick up.


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