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Depoliticizing stimulus policy

By Dylan Matthews

It's in Wonkbook, but I wanted to highlight Laurence Seidman's op-ed on using unemployment level triggers as part of stimulus proposals. I could do without his requirement for balanced budgets when the unemployment rate falls below 6 percent, but this seems very sound:

Congress should enact a set of temporary tax cuts and expenditures to stimulate the economy. This legislation must contain a phase-down schedule so that these temporary measures are phased out as the unemployment rate, which is currently over 9 percent, falls below 9 percent, then 8 percent, then 7 percent, and are completely terminated when the unemployment rate falls to 6 percent.

In a way this is the flip side version of Alan Blinder's independent tax policy authority proposal, which would charge a group of Federal Reserve style technocrats with determining federal tax rates, accounting for need for stimulus, budget balance, equity and other factors. This uses a blunter mechanism than a panel of experts, but its priorities are also clearer. As we've seen with the Fed the past two years, the policy goal that Congress and the public value -- reducing unemployment -- is not an overriding concern for Fed officials. Having Congress trigger fiscal policy explicitly on unemployment figures would make sure the focus is on job losses.

The hard part would be putting a price tag on, and then passing this. Like TARP, it's something where the sticker price -- that is, the price if the bill's funds run out without any triggers being met -- is very high, but the likely price is much lower. But congressmen will likely decide based on the worst-case scenario, and, as we've seen in the recent jobs debate, won't consider the future revenue gains coming from stimulus-induced growth. Some assumptions going the right way at the CBO could help, but getting Congress to vote for a bill that looks a lot bigger than it will eventually be would be tough.

-- Dylan Matthews is a student at Harvard and a researcher at The Washington Post.

By Washington Post editor  |  July 9, 2010; 9:21 AM ET
 
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Comments

"Congress should enact a set of temporary tax cuts and expenditures to stimulate the economy. This legislation must contain a phase-down schedule so that these temporary measures are phased out as the unemployment rate, which is currently over 9 percent, falls below 9 percent, then 8 percent, then 7 percent, and are completely terminated when the unemployment rate falls to 6 percent."

The budget deficit today is ~10%. Let's assume that will additional stimulus it will hit 11% for FY2011. Let's also assume that unemployment is 9.1% at the start of FY2011, and we think we can get unemployment down 1%/yr, so by FY2014 we're at ~6% and have a balanced budget.

At that pace, we need fiscal drag of about 3.67% of GDP for FY2012, FY2013 and FY2014. From a Keynesian perspective, how does a strong economic recovery occur under this backdrop? In a sense, it would be something like a $2 trillion dollar 3-year anti-stimulus starting in 2012.

Why not just have the Fed target NGDP based on the old trend line, which would result in a massive monetary stimulus, and cut spending starting now, other than individual relief?

If NGDP targeting is successful, we can enact a balanced budget amendment because monetary policy can do the heavy lifting. If it fails, well then maybe pumping up aggregate demand doesn't necessarily work. Maybe the Austrians are right and we're just hosed for a few years.

Posted by: justin84 | July 9, 2010 11:42 AM | Report abuse

"Congress should enact a set of temporary tax cuts and expenditures to stimulate the economy."

Since when have temporary tax cuts acted as successful stimulus? The 2001 and 2008 rebates are widely regarded as failures, even (especially) by Keynesians.

Posted by: justin84 | July 9, 2010 12:05 PM | Report abuse

This sounds like quite a reasonable idea. We need to get away from the notion that the unemployed are to blame for unemployment.
btw, if you're search for employment I have been hearing great job search advice on an internet radio show at www.jobtalkamerica.com

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