Robert L. Bixby

Unlock common sense in public spending

By Robert L. Bixby
July 18, 2010

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CAN WE handle the truth? More specifically, can we handle the truth when it is ambiguous? That is a question policymakers and the public face as they grapple with the best way forward on fiscal policy.

In troubling times, the desire for certainty is understandable, but it can also lead to hasty and ill-considered decisions.

The truth is that policymakers are operating in a world of uncertainty and risk.There is danger in applying too much fiscal stimulus: rising interest costs, dependence on foreign lenders, and the prospect of future inflationary bubbles. But there is also danger in withdrawing fiscal stimulus too fast: double-dip recession, rising unemployment, and deflation.

No one really knows the correct calculation but that is no reason to insist on a one-size-fits-all fiscal policy.

We have two distinct problems. The economy remains shaky in the near-term, and fiscal policy remains unsustainable in the long-term. These problems can, and should, be treated with different remedies.

The good news is that we can treat both problems at once if we set aside rigid ideological straitjackets. Fiscal stimulus need not have an adverse impact on economic growth over the long term, and long-term discipline need not have an adverse impact on economic activity in the short term. We don’t need to sacrifice one to achieve the other, but we need to be clear about the trade-offs.

As Douglas Elmendorf, director of the Congressional Budget Office, recently said, “There is no intrinsic contradiction between providing additional fiscal stimulus today, while the unemployment rate is high and many factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be close to their potential.’’

This suggests that deficit-financed initiatives may still be appropriate for policies with the highest propensity to support the near-term recovery. Items that fit into this category include extended unemployment benefits and further, but temporary, aid to state and local governments. These policies would directly address serious needs created by the severe recession without adding to the long-term structural deficit.

At the federal level, we can hold down the size of near-term deficits and help engender public trust that tax dollars are not being wasted, by making every effort to identify savings from unnecessary programs.

That includes cutting narrowly targeted tax breaks that add to the complexity of the tax code without producing meaningful economic benefits. Such provisions divert resources from more pressing national needs and increase public cynicism about the fairness of the federal budget.

Again, there is no inconsistency in cutting some under-performing programs while boosting spending (or cutting taxes) in areas where it will do more good.

We can also insist that as a condition for federal aid, state governments prepare fiscal recovery plans that show progress in meeting sustainability goals. That would allow funds to keep flowing where needed while acting as a catalyst for necessary fiscal reforms.

Long-term planning, however, is not just a state responsibility. The federal budget is already on an unsustainable track. More deficit spending will add to the long-term problem by increasing interest costs and diverting capital that might otherwise be used to help grow the economy.

Even with a robust recovery in the next few years, the pre-existing mismatch between future benefit promises and current levels of taxation would leave us on an unsustainable path. No amount of fiscal stimulus will solve that problem. This makes it all the more important to combine near-term deficit spending with a credible plan to bring our long-term structural deficit under control.

Balancing the risks, we should keep assistance flowing in those areas where it is most needed and can take effect most swiftly, and, as soon as possible, begin a planned phase-in of spending cuts and tax increases that will bring the structural deficit under control.

Of course, this will require some compromise.

Can we handle that?

Robert L. Bixby is executive director of The Concord Coalition.

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