Saturday, October 18, 2008

We can fight the recession, make large high return government investments, and balance the budget, all three – over four years.

It's common now to hear implied, or stated explicitly, that we have to choose between balancing the budget and fighting the recession, or between balancing the budget and investing in high social return projects. This is wrong on the latter as we can and should greatly increase government spending on high return projects, and we can just pay for them with increased taxes on the wealthy, or better yet, once the recession is over, more than pay for them to turn the deficit into a surplus. The former is also wrong at least over a period of four years.

In the first four years of what will hopefully be an Obama administration, we can do all of these things; fight the recession, make large high return government investments, and balance the budget. And four years is really not that long to wait for all of that.

It is important to keep in mind that with intelligent government, i.e. not Republican, we can deal effectively with both the short-term demand crunch (recession) and the long-term deficit. We just pass the measures now (shortly after the new, hopefully Obama, administration begins) that will stimulate short run demand and not lower the deficit, but then after two years these measures schedule steady increases in taxes on the wealthy to the point where the budget is balanced by 2013, and in surplus thereafter, until the entire national debt is paid off by 2020 (or at least there is no debt net of government savings).

By passing the tax increases now which will lead to the budget surpluses, but having them phase in later, after the recession is over, we fight the recession, but we still give confidence to the public and purchasers of our bonds that we are committed to a path of fiscal soundness. A large amount of the tax increases on the wealthy could still take effect immediately, without hurting the fight against the demand crunch, as long as they are countered by tax cuts for the middle class and increased high social return government spending.

The first part of the plan is to greatly increase spending -- as soon as possible -- on government investments of the kind that have extremely high social returns, yet will be grossly underprovided by the free market due to well proven in economics market problems like externalities (especially the grossly underappreciated gargantuan positional/context/prestige externalities, the pink elephant of economics), inability to patent, and many more. A great example is alternative energy. For more on the compelling case for these government investments please see here and here.

These projects help both the short-run demand crunch (increasing short-run spending on, and demand for, goods and services) and the long-run national debt (increasing national productivity -- and income -- over the long run, because of the high returns of these projects). Again, a great example is investment in alternative energy. How about spending an extra $200 billion on that, rather than increasing demand the Republican way, by giving $200 billion predominantly to the wealthy in a tax cut, and then saying go on a shopping spree, so we stimulate demand employing people to produce lots of new yachts, $3,000 suits, and $200 meals, instead of a solar grid, wind farms, and lots of R&D to make these things much better, much faster.

This is all very do-able; it's just like the vast majority of intelligent highly beneficial plans it takes voting out enough Republicans that it can pass.The less Republicans we vote out, the less likely it is that something like this will happen -- and history has really shown this; under Republican administrations the economy has been far worse; the stock market has been far worse, and the deficit has been far worse (see here, here, here, and here).