"If the government raises taxes to hire the unemployed, then the unemployed who now get jobs will likely quickly spend all the money they earn on new consumption, since they have been strapped and now have jobs. The currently employed, who will see their taxes go up, will likely not cut their expenditures as much because they are habituated to their current level of consumption"

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The New Republic -
Yes, We Can Do Stimulus Without Adding Debt. Here’s How
August 29, 2011

By Robert Shiller, professor of economics at Yale University, co-author, with George Akerlof, of "Animal Spirits".


Yes, We Can Do Stimulus Without Adding Debt. Here’s How


Some excerpts :

And it is unlikely that a balanced budget stimulus would “crowd out” private expenditures on goods and services by pushing up interest rates. The Fed has already committed itself to keeping interest rates at zero until 2013.

The big problem with balanced budget stimulus is political, namely that there is a huge opposition to tax increases right now, primarily among Republicans. But their resistance might be softened if they were made aware that a balanced-budget stimulus would not lower average after-tax income: Every dollar of increased taxes could go toward giving someone extra income. (Though it's true that the people who would see their taxes increased the most are not likely to be the same people who would see their income increased.) Moreover, any public concerns about the high national debt should easily be allayed by the balanced budget stimulus, as it would probably lower the debt to GDP ratio by raising the denominator (GDP) without increasing the numerator (debt).

The balanced budget stimulus could also be designed in such a way as to avoid substantially increasing the size of the government. People often seem to think that government expenditures on stimulus means hiring people to sit at a desk at a government agency, or to clean up trash in the local national park. But that is not at all the way it has to be.

In enacting the stimulus, we could take as our model the National Science Foundation, through which the federal government sponsors scientific research. The government does not hire scientists directly through the NSF. Instead, it makes grants to individual scientists in universities and research facilities. The choice of who gets what grants are largely made by panels of non-government scientists who are called in to help the NSF evaluate the grant proposals. Those procedures could easily be extended beyond scientific research to other industrial areas.

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The essential idea, again, would be to raise taxes and raise expenditures, simply for the duration necessary to push us out of our current bad equilibrium. For plenty of policymakers, the phrase “tax-and-spend” has become a four-letter word, but it might just offer the optimal solution to our present crisis.

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