How To Stimulate Without Increasing The Deficit At All

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"How To Stimulate Without Increasing The Deficit At All"

Robert Waldmann crafts a proposal to stimulate short-run aggregate demand without increasing the short term deficit. Just make the tax code more progressive on a temporary basis:

I think the solution is a temporary increase in the progressivity of the tax code. A temporary tax cut for the poor will cause a large increase in their spending as many of the poor are liquidity constrained. A temporary tax increase for the rich will cause a small decrease in their spending as few of the rich are liquidity constrained.

Explicitly temporary tax cuts do not all become permanent. There is no movement to extend the temporary tax cuts in the stimulus bill, even though Obama promised permanent tax cuts which were to be identical except five fourths as big. It might be hard to let a temporary tax increase for the rich expire. So my approach might reduce the deficit in the long run.

Waldmann conjectures that “none of the people who claim they oppose further stimulus because it will add to the bet will support my proposal” and I’m likely to agree with him. But it should work. It’s been disappointing to me to see how bad our political institutions are at responding to an economic downturn. There’s a lot of different moving pieces to economic policy, and as Waldmann’s exercise shows it’s generally possible to craft ideas that meet all sorts of broad constraints. In a sane world, Congress would be interested in exploring these options and pick one of them. Instead, we’ve had an assortment of small-bore “jobs bills” none of which seems especially well thought or or appropriately sized to the scope of our problems.

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