The Case for More Stimulus (And Bigger Deficits)

Exit polls taken on election day leave little doubt that Americans care much more fixing the economy than lowering the defict. Nearly 60 percent of voters said the economy was the most important issue facing the country; just 15 percent named the deficit. 

Among elites in Washington, though, this thinking is reversed. Leaders from both political parties agree that reducing the deficit is a top priority and are gearing up to tackle this challenge as part of the fiscal cliff negotiations. While some liberal members of Congress are still talking about big new proactive steps to stimulate the economy, the dominant view among Democrats -- including Obama -- is that Washington should simply avoid any steps that would hurt the economy as it proceeds forward with the all-important work of deficit reduction. In other words, the voters spoke clearly on election day -- only to be promptly ignored. 

But just for argument's sake, let's say that our political system really did listen to the voters. What would a policy approach look like that focused first and foremost on fixing the economy and put deficit reduction on the back burner? 

The best answer to this question comes from the Economic Policy Institute, which issued a budgetary blueprint two weeks ago that proposes major new investments to strengthen the economy and create jobs. The paper -- written by Josh Bivens, Andrew Fieldhouse, Ethan Pollack, and Rebecca Thiess -- is a refreshing antidote to the austerity madness that has gripped Washington for the past few years (and brought Europe's economy to its knees). The authors write:

Our proposed federal budget is driven by three fundamental truths. First, the near-term budget deficit is largely a symptom of the poor economy, and therefore any fiscal proposal must include a plan to get the economy back on track. Second, tax and budget policy should share the same goal as broader economic policy: providing rising living standards and greater economic opportunity and security for all Americans. Third, a truly sustainable budget provides future generations not only with manageable debt levels but also the building blocks of a prosperous economy: increased investments in infrastructure, education, and R&D, and a strong safety net to ensure that future generations have at least the same baseline levels of economic security on which millions of households currently rely.

In specific terms, EPI's plans would cancel the budget cuts scheduled to take effect through sequestration and add new spending on top of that:

Our budget repeals the entire BCA, which applies disproportionate cuts to the non-security discretionary budget, half of which consists of public investment. Our budget goes further in investing in our nation’s infrastructure, education and training, and research and development by financing a permanent increase in public investments of $200 billion in 2013, which is then indexed to nominal GDP growth in subsequent years. We additionally finance $425 billion in state and local fiscal relief through 2017 to protect public investments at the state and local level and boost employment, as well as $250 billion for a public works and direct employment program over 2013–2014.

Amen to all that. And to its credit, EPI is totally up front about the fiscal implications of what it is proposing. As Josh Bivens wrote about their plan: 

To be clear, this means policymakers should aim for larger budget deficits in the next three years to finance job-creating public investments and transfer payments. Without a return to full employment—which is by no means guaranteed without aggressive policy actions—budget deficits will exceed current long-term forecasts because large cyclical budget deficits will persist as long as the economy remains depressed.

This is a point that progressives have been repeating for four years now: The best long-term solution to deficits is strong growth, and borrowing now to stimulate such growth will actually mean less debt over time. 

This isn't a fashionable point of view in Washington, but it's common sense to many economists. Oh, and also to many ordinary voters.