Sat, Mar 23, 2013 - Page 9 News List

Debt-friendly stimulus measures the only way to escape slump

By Robert Shiller

Debt-friendly stimulus might be regarded as nothing more than a collective decision by all of us to spend more to jump-start the economy. It has nothing to do with taking on debt or tricking people about future taxes.

If left to individual decisions, people would not spend more on consumption, but maybe we can vote for a government that will compel us all to do that collectively, thereby creating enough demand to put the economy on an even keel in short order.

Simply put, Keynesian stimulus does not necessarily entail more government debt, as popular discourse seems continually to assume. Rather, stimulus is about collective decisions to get aggregate spending back on track. As it is a collective decision, the spending naturally involves different kinds of consumption than we would make individually — say, better highways, rather than more dinners out. However, that should be okay, especially if we all have jobs.

Balanced-budget stimulus was first advocated in the early 1940s by William Salant, an economist in then-US president Franklin Roosevelt’s administration, and by Paul Samuelson, then a young economics professor at the Massachusetts Institute of Technology. They argued that, because any government stimulus implies higher taxes, sooner or later, the increase might as well come immediately. For the average person, the higher taxes do not mean lower after-tax income, because the stimulus will have the immediate effect of raising incomes. And no one is deceived.

Many believe that balanced-budget stimulus — tax increases at a time of economic distress — is politically impossible. After all, French President Francois Hollande retreated under immense political pressure from his campaign promises to implement debt-friendly stimulus.

However, given the shortage of good alternatives, we must not assume that bad habits of thought can never be broken, and we should keep the possibility of more enlightened policy constantly in mind.

Some form of debt-friendly stimulus might ultimately appeal to voters if they could be convinced that raising taxes does not necessarily mean hardship or increased centralization of decision-making.

If and when people understand that it means the same average level of take-home pay after taxes, plus the benefits of more jobs and of the products of additional government expenditure (such as new highways), they may well wonder why they ever tried stimulus any other way.

Robert Shiller is a professor of economics at Yale University.

Copyright: Project Syndicate

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