First, we should rule out deficit spending to finance a consumption binge. As the economy slows, the deficit will widen even without changes in fiscal policy. But an honest budget policy would be calibrated to balance the budget over a complete business cycle. Years of cyclical deficits will be offset by years of cyclical surpluses. As a corollary, we must not waive pay-as-you-go rules that require spending that increases the current deficit to be offset later, when the economy is stronger.
Second, we can plan well in advance. The federal government has a critical role in maintaining and developing public infrastructure, whether in transportation, telecommunications or energy transmission projects. A sensible capital budget would include a prioritized list of projects that need attention. Some would be slated for this year, some for 2009 and so on, over the useful lives of the projects. When economic growth falters, the government would be in a position to move some of the projects from later years into the present year.
This approach to counter-cyclical fiscal policy has several advantages. Perhaps most obvious is that it forces the government to establish priorities for capital projects. It reduces overall expenditures by doing more of the work in times of economic slack, when costs are lower. It also abides by pay-go rules, since projects moved up to 2008 need not be done in 2009. With a little forethought, short-term economic concerns and long-term budget goals need not be in conflict.
In fact, we have gotten the opposite in both cases, with inadequate short-term boosts to economic activity and a worsening long-term budget picture. As Paul Krugman noted today, in the context of continued declines in investment by state and local governments:
It’s hard to overstate just how wrong all this is. We have a situation in which resources are sitting idle looking for uses — massive unemployment of workers, especially construction workers, capital so bereft of good investment opportunities that it’s available to the federal government at negative real interest rates. Never mind multipliers and all that (although they exist too); this is a time when government investment should be pushed very hard. Instead, it’s being slashed.
If only someone had mentioned this years ago ...
1 comment:
It's hard not to be cynical about this. Many in the Congress and administration had every intention of doing long term construction projects and to improve the capital infrastructure. The Republican leadership in the Senate decided that their political fortunes would be better if they kept the economy in ruins until the 2012 election cycle. Using the brand new "60 votes are required to pass a law" rule, they blocked every effort. Thus, we wound up where we did.
If the Republican nominee (Romney, I suppose) wins in November, then you will see these projects unleashed, because the money will go to Republican donors. They never cared about deficits, they only cared about ruining the economy for the 2012 election.
If Obama wins, we'll still be in the same place, as the calculation will change to "2016".
At my age and demographic, I should be turning into a Republican; yet I am repulsed by these hypocrites and wouldn't associate with them if my life depended on it.
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