The Turing Test: Who Can Successfully Explain Robert Nozick?
Stan Collender: Don't Believe What You're Hearing About Budget Talks

Our Need for Expansionary Fiscal Policy: Alan Blinder Explains Why the Republican Party Deserves Political Annihilation

Alan Blinder:

Alan Blinder: The GOP Myth of 'Job-Killing' Spending: It was the British economist John Maynard Keynes who famously wrote that ideas, "b House Speaker John Boehner and other Republicans regularly rail against "job-killing government spending." Think about that for a minute. The claim is that employment actually declines when federal spending rises.... Acting on such a belief would imperil a still-shaky economy that is not generating nearly enough jobs. So let's ask: How, exactly, could more government spending "kill jobs"?... [H]ow is it that public purchases of computers destroy jobs but private purchases of computers create them?

One possible answer is that the taxes necessary to pay for the government spending destroy more jobs than the spending creates. That's a logical possibility, although it would require extremely inept choices of how to spend the money and how to raise the revenue. But... the current debate is about deficit spending: raising spending without raising taxes....

A second job-destroying mechanism operates through higher interest rates. When the government borrows to finance spending, that pushes interest rates up, which dissuades some businesses from investing.... There are times when this "crowding-out" argument is relevant. But not today. The Federal Reserve has been holding interest rates at ultra-low levels for several years, and will continue to do so. If interest rates don't rise, you don't get crowding out....

Let's try one final argument that is making the rounds today. Large deficits, it is claimed, are creating huge uncertainties (e.g., over what will eventually be done to reduce them) and those uncertainties are depressing business investment. The corollary is a variant of what my Princeton colleague Paul Krugman calls the Confidence Fairy: If you cut spending sharply, confidence will soar, spurring employment and investment.

As a matter of pure logic, that could be true. But is there evidence? Yes, clear evidence—that points in the opposite direction. Business investment in equipment and software has been booming, not sagging. Specifically, while real gross domestic product grew a paltry 2.3% over the last four quarters, business spending on equipment and software skyrocketed 14.7%. No doubt, there is lots of uncertainty. But investment is soaring anyway....

[I]t is undeniable that we have a tremendous long-run deficit problem to deal with—and the sooner, the better.... Suppose we enacted a modest fiscal stimulus program specifically designed for maximum job creation... a tax credit for firms that add to their payrolls.... And suppose we combined that with a serious plan for reducing future deficits—and enacted the whole package now. Then we could, in a sense, have our cake and eat it, too. A package like that is not fantasy. I believe that a bipartisan group of economists, if given the authority, free of political interference, would design some version of it. But... as long as one political party clings to the idea that government spending kills jobs, it's hard to see how we extricate ourselves from this mess. As Keynes understood, ideas, whether right or wrong, have consequences.