Wednesday morning, starting at 10am, I’m on a panel testifying to the Senate Budget Committee about the need for a fiscal stimulus. The other witnesses are Mark Zandi and John Taylor.
I’ll post my written testimony after the hearing. I expect to make three main points in my verbal remarks:
1) We are heading into a serious global recession, caused by and in turn causing a process of global leveraging (i.e., reduction in lending and borrowing). We have never seen this kind of deleveraging – synchronized around the world, fast-moving, and with an unknowable destination.
2) I do not think we can prevent this deleveraging from happening. Nor do I think we should even try to keep asset prices high (or at any particular level). But in the United States we have the ability to mitigate some of the short-run effects and to lay the groundwork for a sustainable, strong recovery. One sensible tool to use in this context is fiscal policy. I lean towards smart spending programs, but as the economy continues to worsen, I think some kind of temporary tax cut could also help – it can potentially have relatively quick effects. (Note: contrary to those who think that if tax cuts are saved by consumers, they are somehow “wasted,” I would point out that anything that improves consumers’ balance sheets is both good for them and for the financial institutions that lend to them.)
3) But there is a real limit to how far we can go with fiscal policy (and with other policy measures). Irresponsible budget policies would not be a good idea – we need to continue a process of fiscal consolidation; it is most vital that people around the world remain confident in the U.S. government’s balance sheet. Some of the highest numbers now being proposed for a fiscal stimulus are probably too high and a mega-stimulus could be counterproductive if it undermines confidence.
I’m proposing a fiscal stimulus of roughly 3% of GDP, to be spent over several years. Given the uncertainties involved, this seems like reasonable middle ground – it’s enough to make a difference, but doesn’t promise a miracle; it can be spent sensibly and at an appropriate speed; and it will not undermine our ability to consolidate the U.S. fiscal position (i.e., bring government debt onto a sustainable path) over the medium-term.
Mitt Romney And Paul Ryan’s Budget
By Simon Johnson
The conventional wisdom in American presidential politics is that once a candidate has secured a party’s nomination, he tends to move away from articulating the views of the party faithful toward the political center. This makes sense as a way to win votes in the general election, and there has been a presumption that Mitt Romney will head in that direction.
However, in a panel discussion on Tuesday, Vin Weber, a senior adviser to Mr. Romney, indicated that the campaign may be moving toward positions on fiscal policy that are close to those proposed by Representative Paul D. Ryan of Wisconsin and his Republican colleagues on the House Budget Committee. Continue reading →
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Tagged Budget, Mitt Romney, Paul Ryan