Short-Term Fiscal Policy: Copping Out or Stepping Up?

Are President Obama’s recent short-term fiscal proposals the brave radicalism this country needs?

Are austerity policies to address long-term debt and deficit problems the answer? Or should countries like the U.S. and Europe implement policies that provide solutions to fix problems that we face today like stagnant economic growth rates and chronic unemployment or, at least underemployment. And do short-term solutions address today’s problems in a significant way or do they only provide a Band-Aid and make it harder to fix longer term problems?

Paul Krugman says in his op-ed for The New York Times that U.S. economic policy should become much more near-sighted if we want to solve the most important problems we face. Especially in the face of “the aftermath of a once-in-three-generations financial crisis,” now is not the time to fret over long-term issues. He attributes this behavior to “intellectual laziness and lack of moral courage.” Krugman refers to John Maynard Keynes’ thoughts on the long run, particularly the context in which Keynes wanted us to consider his words. He compares long-run economists to meteorologists who tell us the water is calm long after everyone knows the storm has passed. In the end, Krugman applauds Obama’s courageous willingness to “break with the long-termers and focus on the here and now.”

Sheila Blair, past Chairman of the Federal Deposit Insurance Corporation, cautioned Americans of the other extreme in 2011. Blair calls short-term monetary policy response a Band-Aid on a bullet hole “that feels good for awhile but does nothing to enhance the long-term performance of our economy.” Blair calls for short-term sacrifices to support long-term reforms in social security and healthcare, exactly what Krugman laments has been ineffective as well as “craven and irresponsible”. Blair explains that (even back in 2011), “In a world obsessed with instant gratification and lightening-round debates, we are in dire need of leadership, both public and private, that will champion patience and sacrifice now in return for a brighter and more stable future for us and our progeny.”

Gilles Saint-Paul, program director for the Centre for Economic Policy Research in France, writes about the importance of long-term fiscal policy because “(i) deficits and surpluses are useful in stabilising macroeconomic activity and (ii) tax rates should be smoothed over time in order for the tax system to be efficient.”

Personally, I identify over-correction as one of the greatest risks of short-termism in economic policy. Because monetary policy and (especially) fiscal policy take time to implement and even more time to see the effects of. Controlling for what is best in the short-run may not always be the best solution because by the time the effects of policy changes can be observed we have overcorrected for the problem and then face the opposite setback.

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