Peter Orszag has a great column about how it’s too soon to be celebrating an economic recovery given that we keep learning more about the long-term economic damage of hysteresis and it looks really bad.
But then he concludes with his curious insistence that fiscal stimulus efforts should be focused on a “barbell” approach, where short-term expansion is paired with longer-term deficit reduction. He offers two arguments for this. First he says that “the austerity will help prevent a future fiscal crisis,” and second he says, “the combination is more politically feasible than either component alone.” On the merits he’s right, but he’s wrong. It’s true that a stimulus bill that also does long-term fiscal consolidation would be better than a stimulus bill that does nothing but stimulate. By the same token, pairing stimulus with comprehensive immigration reform or with a serious plan to reduce American greenhouse gas emissions would be better than doing stimulus alone. It’s always better to do two good things than one good thing. But that’s no reason to insist that you can only do a good thing if you also do a second good thing. Legislating is hard.
The political argument is, I think, outdated. If I could take a time machine back to 2009 and whisper in the ears of the Democratic chairman of the House and Senate budget committees, I would definitely urge them to write reconciliation instructions for a “second stimulus” as a fallback in case ARRA proved inadequate. Both to comply with reconciliation rules and to address the political concerns of moderate Democrats, those instructions would have had a barbell form. Then the question facing Congress in the winter of 2009-2010 would be whether the White House could come to terms with the House Blue Dogs (and their Senate equivalents) who held the legislative pivot points on a barbell stimulus/austerity combination.
But this isn’t the 111th Congress, it’s the 113th Congress. The key issue in the 113th Congress is that Democrats won’t agree to an austerity program that doesn’t include tax hikes, and Republicans won’t agree to tax hikes.
The way to get stimulus is to sidestep this trainwreck, not make your stimulative agenda contingent on solving it. That means, in practice, that if the White House wants stimulus, it needs to take advantage of the fact that GOP opposition to deficits is 99 percent bullshit posturing and give them what they want. Rescind the defense sequester and just don’t offset it. Stage a corporate income tax repatriation holiday. Say there will be no long-term capital gains on new investments undertaken in 2013. Liberals will hate these ideas and, indeed, they’re not very good ideas. But they would stimulate the economy in the short-term and, though the hysteresis channel, improve the long-term economic outlook. Now, Obama doesn’t want to do that stuff because there are things he cares about more than he cares about stimulus. But the barbell strategy has failed every time it’s been tried. The only really successful follow-up stimulus initiative was the 2010 lame duck deal extending the Bush tax cuts and creating a payroll tax holiday. That worked because it took advantage of the fact that Republicans don’t actually care about the budget deficit.