Committee for a Responsible Federal Budget

Blinder on the Fiscal Policy Paradox

Oct 25, 2010

In an op-ed in today’s Wall Street Journal, Alan Blinder discusses his frustrations with what he dubs the “fiscal policy paradox”: that the economy-boosting “policies that might work won’t be tried,” due to partisan infighting, and the “policies that will be tried might not work.” He laments that fiscal policy has largely been on the sidelines while monetary policy undertaken by the Federal Reserve has done most of the heavy lifting to spur the economy. He argues for the reverse and contends that while monetary policy is close to being out of bullets, there is plenty of fiscal artillery left. Blinder goes on to detail just a few of the ways in which fiscal policy could help speed up economic growth.

  • A sustained, large-scale new jobs tax credit would offer tax incentives for firms to increase employment above a certain level;
  • Increased government hiring, like that done by FDR during the New Deal, would also put more people back to work and increase growth;
  • Third, a sales tax cut to encourage consumer spending.

These three options are only a few of the myriad possibilities out there, says Blinder, but partisan paralysis and demagoguery are preventing any comprehensive response. Blinder is correct in pointing out that political factors are hindering the formulation of rational fiscal policy at a critical time. He is also right in arguing that stimulative measures, coupled with credible future deficit reduction, could pack a potent punch. We wish he would have provided his best deficit reduction proposals along with his stimulus ideas.  

This argues for a credible fiscal plan to be implemented as the economy gains strength. The deficit should not be an excuse for blocking all stimulative measures, but medium- and long-term debt concerns dictate that any stimulus be well-crafted to have the most bang for the buck and be devised in a way that it does not add to the debt in the longer run.