Monday, November 26, 2012

When You Come to a Fiscal Cliff, Take It

That's my main point in a Faculty Forum Q&A posted to the Dartmouth website last week.  Eight plus years of blogging, and you know what to expect:

What would you like to see happen?
Our biggest problem is that we’ve become accustomed to having a tax system that doesn’t raise enough revenue to cover our expenses. We’d be closer to it if we allowed all the policies in the fiscal cliff to actually revert. It’s not ideal to have them all revert at once, but that’s better than continuing to kick the can down the road. When you come to a fiscal cliff, take it.

Having the policies all revert is being portrayed in media coverage as the worst possible thing that could happen. 
No. Continuing what we’re doing is worse. Look, I’ll pay more in taxes, you’ll pay more in taxes—we’ll all pay more in taxes. The fact that we’re paying more taxes means that we’re covering more of our own bills.

If taxes go up, how do we avoid an economic slowdown?
We don’t have a problem that private consumption is too low. We have a problem that public investment is too low. If you were really worried about a decline in economic activity, you would let everything revert, and then you would commit to spending an extra $350 billion per year on public infrastructure, even if it had to be debt-financed. I would ramp up public investment in infrastructure and other critical national needs like roads, civilian defense, disaster infrastructure, smart grids, and basic research and development. All of these are needs that we’ve been neglecting.

Bill Gale of Brookings has been saying this for some time -- here is a recent interview with NPR -- though he and I offer different suggestions for how to spend the additional revenue to help promote economic growth in the short term.

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