The Trouble With Fiscal Stimulus, Part Zwei

I think this tax deal illustrates what I was getting at in my post on the trouble with fiscal stimulus. If you look at this deal very literally, Republicans were asking for some measures that Democrats regard as only very very very modestly stimulative and in exchange for giving it to them Barack Obama got them to agree to some measures that Democrats regard as substantially more stimulative. And stimulus, say progressives, should be the order of the day. Under the circumstances, progressives should be jumping for joy!

But of course nobody on the left is actually jumping for joy. Instead in the words of my colleagues Michael Ettlinger and Michael Linden we’re at best saying that “[i]t is, however, unfortunate that these jobs have to come from an agreement that is a balance between large, unneeded, bonus tax breaks for the wealthiest Americans and the needed continuation of unemployment benefits, middle-class tax relief, and additional help for the economy for the rest of us.”

At worst we’re where David Dayen is, already looking forward to the day when the hole in the budget blown by the Bush tax cuts becomes rhetorical justification for spending cuts that undue the stimulative impact of the good ideas in here:

In a world where this tax cut-heavy stimulus goes into place, [moderate Democrats are] likely to whine and argue for major spending cuts to offset the hit to the deficit. In other words, I doubt you get $300 billion in stimulus in the coming year, when all is said and done. In fact, I’d expect far less than that.

Clearly the larger issue here is that nobody really thinks you should in fact take this deal super-literally. If the meaning of a compromise that ends in a two-year extension of the high-end Bush tax cuts was really that the parties agreed to phase the tax cuts out, then this would be a great deal. But clearly Republicans have agreed to nothing of the sort. Instead, they’ve just agreed to re-stage this fight in two years’ time. And while the deal will cause the national debt to grow, the deal doesn’t include an agreement on raising the debt limit. So another standoff and more concessions are right around the corner.

But all these kind of considerations seem to me to be endemic to the concept of discretionary fiscal stimulus in a country that features large disagreements about economic policy. There needs to be stimulus, you say? Well obviously the tendency will be for actors to try to cram policy measures they think have other good benefits (high speed rail, tax cuts for the rich) into the stimulus bargain. But that undermines the political credibility of the bargaining process, tends to sap support for the overall package, and to land you with chronically too-small fiscal measures. You may say “that’s all politics, not economics” but a theory of discretionary fiscal stimulus as a tool of macroeconomic stabilization necessarily needs to be a political theory. And in America, I think that means going forward to the next recession that it means more work on automatic fiscal stabilizers, more thinking about making “unorthodox” monetary policy rule-based, and less optimism about the practical ability of discretionary fiscal policy to deliver the goods.