A New Answer to the Most Important Fiscal Question

The most important question in fiscal policy is also the most difficult: how, as a practical matter, to combine short-term accommodation with a credible commitment to medium-term restraint. In the US, this is something nobody much likes to discuss. Liberals don't want to talk about medium-term restraint (except for raising taxes on the 1%) and conservatives don't want to talk about short-term accommodation (they want tax cuts, but they always want tax cuts). I'm not a member of the austerity-now school but they have a point when they say--as Britain's Tories did when announcing their severe budget cuts--that the only way to make a promise of future restraint credible is to start at once. If that's wrong, as I hope it is, what's the alternative?

One possibility I've mentioned before is greater reliance on automatic stabilizers. Martin Wolf, discussing British fiscal policy, has another suggestion, though he rather buries it toward the end of the piece:

The starting point must be to stick to the announced cuts in current spending. If that is brought down to sustainable levels, even relative to a pessimistic view of potential output, credibility should be ensured. But temporary tax cuts could promote spending: national insurance charges and value added taxes are obvious candidates... When the government can borrow at real interest rates of below zero, good, time-limited investment projects must make sense. [My emphasis.]

Britain's position is different from America's of course. Their spending cuts have already been announced, which alters the political calculation: the US isn't starting from the same place. Nonetheless, how about it? Cut ongoing programs immediately by enough to fix the long-term problem, then provide the necessary fiscal accommodation through temporary tax cuts (payroll tax) and new infrastructure projects (time-limited by nature).

Wolf says it probably won't happen in the UK. It probably won't happen in the US either. The question is, should it? Wolf has a wide following among US liberals because he has argued so effectively against over-zealous fiscal tightening. Paul Krugman loves to quote him. I'd be interested to know what they make of "the starting point must be to stick to the announced cuts in spending".

Presented by

Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

Video

Pittsburgh: 'Better Than You Thought'

How Steel City became a bikeable, walkable paradise

Video

A Four-Dimensional Tour of Boston

In this groundbreaking video, time moves at multiple speeds within a single frame.

Video

Who Made Pop Music So Repetitive? You Did.

If pop music is too homogenous, that's because listeners want it that way.

More in Business

Just In