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The Mismatch Between Economic Consensus and What To Do About It

 [Guest post by Matthew Zeitlin]


When Congressional Budget Office head Douglas Elmendorf sat down with reporters on Tuesday to give the CBO’s update on the budget and economic outlook, he repeatedly shied away from one word: should. The CBO, Elmendorf said multiple times, does not make recommendations to policy makers about what policies they should pursue. They merely provide analysis on the state of the economy and the budget, as well as projections for the effects of proposed policies. That being said, an interesting moment of the presentation was when, in response to a reporter, Elmendorf explained how one could couple short-term fiscal stimulus, whether in the form of tax cuts, government spending, or a mixture of the two, with medium-to-long-term fiscal restraint, in order to get economic growth up to potential output and avoid the negative long-term consequences of a ballooning federal budget deficit:

We think that given the current state of the economy … that reductions in government spending or increases in taxes in the next few years would reduce output and employment relative to what it would otherwise be … if one coupled near-term increases in spending or reductions in taxes with medium- and long-term fiscal restraint, then one would have the benefit of a near-term stimulus … if done in the right magnitudes, one could offset the negative consequences later in the decade. [note – the transcription isn’t perfect]

What we have here is a statement of a fairly bland consensus position. Right now, when there are substantial unused resources, increased output from the government, whether that means collecting fewer dollars in taxes or going out and buying things, can lead to more growth and lower unemployment. However, there is a long-term cost to a larger budget deficit. So, the optimal policy for short-term output and long-term sustainability is higher deficits now and fiscal restraint later.

In theory, this analysis is almost entirely non-ideological. A liberal Democrat could see what Elmendorf has said and advocate for more government spending now, and higher taxes later. A conservative Republican could take this analysis and say that we need lower taxes now and lower spending later. What’s strange, however, is that the political debate does not reflect the economic consensus. What we instead have is a bipartisan agreement on reduced spending in the short- to medium-term, uncertainty about revenues, and Republicans objecting to any form of short-term stimulus while Democrats propose short-term tax cuts in the form of extending the payroll tax holiday.

So what we’re seeing is not so much a debate between different ways of dealing with a problem, but a debate where one side doesn’t think there is much point in addressing the current problem at all. The end result is to drag the other side into taking a position that is out-of-sync with its own ideology.