Short-term stimulus, long-term austerity

It seems to me that much of the discussion surrounding the stimulus and ‘austerity measures’ and deficits and so forth fails to take into account the different priorities of our short and long term budget horizons. Many businesses will borrow and spend a great deal on capital investment one year in order to expand or increase efficiency and will spend the next few years paying down those debts, cutting back on spending, and so forth.

In the context of government spending, it seems completely reasonable to borrow at exceedingly low interests rates now in order to spend on much needed capital investment (think infrastructure, public services, etc.) and to help stimulate the economy, and then pay down debts, cut spending, and raise taxes during good times. It seems equally sensible to have a payroll tax holiday, and to avoid raising taxes until employment starts to recover. Austerity and tax hikes are well suited to prosperous times when balancing the budget won’t contribute to higher unemployment rates.

Of course, government is rarely run like a business, so we’re left with the competing notions that during good times we should not only spend more, but tax less, and that when things take a turn for the worse we should just do more of the same.

I think a second stimulus makes sense, but this time we should just transfer the money directly to citizens. Why not send a $2500 check to every American who has filed a tax return? Then have a separate infrastructure investment bill directed at pumping much-needed resources into our national infrastructure. Third, give Americans a payroll tax holiday. And finally, take Medicaid away from the states. That’s phase one – our stimulus and capital investment phase, where we take on more debt at good interest rates in order to invest in our country.

Phase two is entitlement reform, a reexamination of sources of revenue including possibly new tax brackets on top-earners and a national sales tax or VAT coupled with a simplified tax code and lower capital gains rates, and reforms to our vastly bloated defense budget. Obviously there are spending reforms that can be made across the board, but entitlements and defense are where the real long-term savings can be made to the federal budget, while pension reform will be necessary both at the federal and state levels in order to shore up increasingly burgeoning payroll obligations to public sector unions.

In other words, I think it’s possible to have it both ways – just not at the same time. We need short-term stimulus and there is never a better time to invest in public infrastructure than during a deep recession; but we need long-term austerity so that we don’t end up in this position the next time a bubble pops. And make no mistake, this isn’t going to be the last recession Americans face, no question about it. The only real question facing us now is how long this one will last.

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