Still Room for Stimulus

Jeffrey Sachs makes some good points on the limited scope for counter-cyclical fiscal action. But he overdoes the pessimism, I think, especially so far as the US is concerned.

He is right that a lot of the stimulus money was a "waste of scarce time and money". It is true, as he says, that a lot of those "shovel-ready projects" were far from shovel-ready. "Creating green jobs" is a long-term project, not a short-term cure-all. And I agree, above all, that the effectiveness of fiscal policy depends on people's beliefs about the future course of taxes and spending.

The US was not in a credible position to raise an already enormous deficit "temporarily" because the prospect for future deficit cutting was and remains extremely clouded. America has absolutely no consensus on how to restore budget balance, as it is trapped between a federal government that provides too few public investments and services and a public that is almost maniacal in its opposition to tax rises. One cannot build a credible long-term fiscal policy by starting off in the wrong direction, with larger rather than smaller deficits.

True. Unless you actually go to the trouble of explaining how you intend to restore fiscal control beyond the short term. This is no doubt difficult to do, but is it really impossible?

The Obama administration has not even tried. The White House compounds popular fears about loss of control over long-term borrowing with implausible claims about how much the Treasury will save by broadening access to healthcare. Aside from that dubious promise, it still has no proposals for long-term fiscal consolidation. It has failed to make the case for higher taxes. You can hardly expect to overcome a "maniacal" opposition to tax increases by remaining silent on the issue. (Meanwhile the left of Mr Obama's party has scorned the idea that the long-term budget deficit might ever be a problem in any case--a line not calculated to reassure the public.)

According to most estimates, the stimulus has worked better than Sachs allows. The CBO reckons it has lowered the unemployment rate by between 0.7 and 1.5 percentage points. Nonetheless last Friday's figures suggest that the US is confronting an unusually tenacious unemployment problem -- an issue I discussed in this column on labour market sclerosis. The outlook is bad enough that further stimulus is warranted. The US can still afford this, so long as the White House also starts to confront the medium-term issue. Among other things, it will have to make the case for higher taxes, as Sachs rightly says.

Mr Obama could try being honest with the electorate. They might respond better than he thinks.