Can we fix the economy (now) without growing the deficit?
How so?
[A]t this point, [deficit-neutral emergency spending is] worth trying. It鈥檚 best to do jobs legislation using deficit dollars. That way you鈥檙e not taking money out of one part of the economy to put it into another. But as Dylan Matthews yesterday, money spent in different places does provide different levels of stimulus. It鈥檚 plausible that you could move cash from, say, tax cuts for the wealthy, which tend to get saved, and use it instead for a payroll tax holiday, or infrastructure projects, or a tier of unemployment benefits for people in states with unemployment rates above 9 percent and who鈥檝e been out of a job for more than 99 weeks.
This is pretty close to what I wrote in a comment to my own on the Bush tax cuts (emphasis added):
[I]t鈥檚 all about: (i) timing, and (ii) distribution. Considering both, I think we can address both the short-term and long-term economic concerns by extending only the middle-class portions of the Bush tax cuts only temporarily. And yes, unemployment benefits still have more stimulative bang per buck than even 鈥渕iddle class鈥� tax cuts in terms of immediately boosting demand for goods and services, because unemployed people have even less income (are more cash-constrained and hence will immediately spend all that you give them) than 鈥渕iddle class鈥� working people.
As for any offsets one might use to 鈥減ay鈥� for stimulus (vs. deficit finance it), the distribution of the burden of those offsets affects how detrimental to the stimulus effort the added costs to households or businesses would be. For the purely short-term goal of immediately boosting aggregate demand, if I pay for extended unemployment benefits by immediately raising taxes on the rich, or cutting government spending that is purely wasteful (as if it is thrown away and benefits no one), such offsets would not 鈥渉arm鈥� the stimulative effect as much as if I pay for those benefits by cutting some other spending that truly benefits/assists low-income households (and hence would undo the helpful effect of additional unemployment benefits).
Most economists assume an effective stimulus requires that on net the spending be deficit financed, because we presume that a 鈥淩obin Hood鈥� deficit-neutral policy (where we would take from the rich to give to the poor) would not be politically viable. Still, that is an example of a deficit-neutral policy that would effectively boost aggregate demand. If it continued too long, however, that effective stimulus would turn into a policy very harmful to longer-term economic growth via the effects on the aggregate supply (labor supply, saving鈥搕he inputs that add to our economy鈥檚 productive capacity) of a full-employment economy.
And later in his , Ezra mentions 鈥渟timulus鈥� as I agree, not just for the knee-jerk, visceral reactions it might incite from people who don鈥檛 like typical 鈥渟timulus鈥� policies, but because it鈥檚 somewhat inaccurate and pretty insufficient in describing short-term countercyclical fiscal policy even among economists who support such policies. Way back when the American Recovery and Reinvestment Act was first passed in February of last year, seemed to me to be a variety of very different (and very ambitious) economic goals. 鈥淪timulus鈥濃�搘hat I interpret as policies designed to provide an immediate boost to (aggregate) GDP鈥搘as just one of the goals. 鈥淎ssistance鈥濃�損roviding help to households suffering from severe drops in their economic well-being鈥搘as another, and that was regardless of whether such assistance at the household level boosted (aggregate) GDP effectively or not. Fortunately, with spending on extended unemployment benefits, it does both, so the fact that we are deficit financing perhaps the final bit of this recession鈥檚 deficit-financed 鈥渟timulus鈥� spending, seems a reasonable鈥揳nd decent鈥搕hing to do. (I tried to suggest so in yesterday morning.)
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