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Peter Orszag, a Proud Member of the Hippie Caucus, Calls for State-Contingent Stimulus Now

Peter:

Link U.S. Payroll Tax Holiday to Unemployment Rate: Today’s fiscal policy debate straddles two divides: one between those who support jobs and those who favor austerity, and one between those who think additional revenue is needed and those who don’t.... [T]he U.S. needs both jobs and austerity.... It would make sense to combine an additional round of temporary job creation measures with a substantial amount of permanent deficit reduction that would be enacted now but take effect later.

The economy remains weak after the bursting of the credit bubble 2 1/2 years ago. In 2007, total private sector borrowing amounted to roughly 28 percent of gross domestic product. By 2009, it was 17 percent of GDP. History shows that economies take substantially longer to recover from this type of financial crisis than from other shocks. Yet we continue to be surprised that our expectations for growth are not realized.... What’s most likely ahead is a prolonged period of relatively slow growth, less than 3 percent per year... that means the unemployment rate will decline only very slowly, if at all.

Lasting weakness in the labor market... can cause people to lose their attachment to the workforce and see their skills atrophy. Already, 6.2 million Americans have been unemployed for more than six months, and 4 million for more than 12 months....

Given our feeble labor market, it is particularly important that policy makers avoid overly hasty deficit reduction. Official projections for the federal budget show fiscal tightening in excess of 2 percent of GDP from fiscal year 2011 to 2012.... [F]iscal tightening in the U.K. from 2010 to 2011 -- which has received so much attention in the news media -- amounted to less than 1.5 percent of GDP.... [P]olicy makers should provide additional macroeconomic support in 2012 by extending the existing payroll tax holiday. But more than that, Congress should link the payroll tax to the unemployment rate. This would allow the tax holiday to automatically calibrate itself to existing conditions....

Such additional macroeconomic support shouldn’t be enacted alone, however, because we must also address our unsustainable long-term fiscal course. Even though it would be wrong to reduce the deficit immediately, it is essential that we enact measures now to lower it over the next decade and later.... It is difficult to see how the 2015 deficit problem can be addressed by cutting spending, and equally difficult to see how the 2050 deficit problem can be addressed by raising revenue. First, the 2015 problem. As the economy recovers, the deficit is projected to decline from about 10 percent of GDP to 5 or 6 percent. This projection, by the way, assumes a more robust recovery than may occur in the wake of a financial-led recession. To the extent that the recovery is sluggish, the deficit will be higher. Stabilizing debt as a share of the economy requires a deficit in the range of 3 percent of GDP.... [I]t is difficult to see how, by 2015, spending cuts could reduce the deficit more than about 0.5 percent of GDP. To make a difference in the next few years, more revenue is needed....

The 2050 deficit problem is different.... We simply can’t raise enough revenue to offset projected spending increases... due to health care....

[R]ight now, we need jobs measures and deficit reduction that would take effect as the economy recovers. From 2015 to 2020, we’ll need more revenue. And looking ahead over the next four decades, we have to contain costs, especially in health care.

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