'Taxing and Spending, in Balance': Commentary by Robert J. Shiller
"Taxing and Spending, in Balance"
By Robert J. Shiller
Published July 24, 2011, by the New York Times.
Read this article in its original context on the New York Times website.
The fight over the debt ceiling has deflected attention from the serious problems of fixing the economy and finding jobs for the 14 million unemployed. Worse, it has created strong negative feelings about fiscal policy, just when other policy measures seem incapable of restoring economic health.
The very term "fiscal stimulus" has become tainted. John Boehner, the House speaker, refers to a "misguided 'stimulus' spending binge." It's a label that reflects how many people have come to think of government expenditures to stimulate the economy—as a binge, maybe like an overdose of amphetamines. For amphetamines, the aftereffects are mental fatigue and depression. For fiscal stimulus, it is the headache of national debt—or at least that is the all-too-common view.
Fiscal stimulus is actually very useful and appropriate in the current circumstances. But rather than despair, we should at least consider what more we should be doing to deal with the pressing issue of unemployment. Let's never give up proposing sensible economic policies.
Over the long haul, we should engage in balanced support of the economy, find worthwhile jobs for the unemployed and not inject stimulus for its own sake. That means we need tax increases matched by higher expenditures on public goods. Of course, both ideas aren't very popular right now—but they should be. Granted, they won't balance the budget immediately; trying to do so would damage the economy. Instead, we should plan to restore budget balance eventually, with matching additions on both sides of the ledger.
In December, I wrote about the concept of the balanced-budget multiplier and of raising taxes and government expenditure by the same amount, dollar for dollar. These ideas were first put on the national stage in 1943 by Paul Samuelson, the Nobel laureate. He argued that such a policy would be one-for-one expansionary: each dollar spent is a dollar of new national income. As long as interest rates are near zero—as they were then and are now—there should be no "crowding out" of private expenditures by government ones.
We can restore some worthwhile projects that have already been cut significantly, including programs in health care, education and other social services, infrastructure, the environment, and the arts and sciences. Beyond that, we should create major new programs, all paid for by additional taxes.
Ideally, these programs should involve real expenditures on goods and services that will immediately create jobs. With enough such support, we should be able to bring down unemployment until increased demand starts taking care of the problem itself.
This is an expansionary change in fiscal policy that won't require additional increases in the national debt. We should start a dialogue right now about taking such action, before the damage of protracted unemployment worsens.
The fighting over the debt ceiling, the concerns about America's credit rating—about the United States somehow going the way of Greece—have all taken a toll. Many people oppose raising the national debt. But the broader public has accepted tax increases many times before, and, with the right leadership, may do so again.
There are good arguments for balanced-budget tax increases. They don't lower average after-tax income, since every tax dollar goes directly to providing someone with income. Even those hurt by a tax increase may accept the sacrifice if they know it improves the chances that unemployed friends or relatives will find jobs.
As a matter of simple math, balanced tax and expenditure increases would lower the ratio of debt to gross domestic product. That's because the numerator (debt) is unchanged while the denominator (G.D.P.) increases. As a result, the policy would tend to strengthen the Treasury's credit rating and restore confidence in the government.
Such a policy needn't make government substantially bigger. Instead, the government would act as a kind of investment banker specializing in public goods. It wouldn't need a lot of employees itself. It would seek private-sector proposals for building infrastructure and other useful projects, and bring in private-sector panels to review them. This would be akin to the role government already plays for science with the National Science Foundation.
We need to start work now on a shelf of ready-to-go plans. The government's Public Work Reserve of the early 1940s provides an interesting precedent. In 2008, Martin Shubik, an economist and emeritus professor at Yale, proposed a Federal Employment Reserve Authority, which might work well. The government's core roles would be simple: to make sure that informed parties participate in selecting projects and, eventually, to come up with the money through its power to tax.
Some people say there are no big, useful projects for government spending these days. That's absurd. We are already cutting important programs. And we've never run out of ideas for what to do with our private spending, despite the manyfold increase in personal income over the last century. The same should be true of public goods.
The problem with the fiscal stimulus that began in 2009 was that there weren't enough worthwhile shovel-ready projects at the time. But this just means that Americans should start thinking now about what to do in a few years if the economy is still in trouble.
Fortunately, this is a resilient country, and some people are already thinking ahead. For example, the Rockefeller Foundation has an initiative that is researching how we can invest in a more efficient, effective transportation system—helping to reduce our time stuck in traffic or waiting in airports, and encouraging a more sensible use of land.
The John D. and Catherine T. MacArthur Foundation has an initiative supporting community-based services for juvenile delinquents, and has shown that such services could reduce the number of offenders under correctional supervision—recently more than seven million people in the United States.
These examples offer models for how we can start thinking about new projects to improve our national well-being—and how we don't need to wait for Congress to act first. But our ideas have to be more concrete. We need big projects for which government support would be truly worthwhile; we shouldn't rely simply on a revival of consumer spending to create more jobs.
Current trends suggest that we may be dealing with high unemployment for years. We should be prepared to provide balanced support to the economy.
Robert J. Shiller is professor of economics and finance at Yale.