ORTHODOXY IS IMPERVIOUS TO FACTS:

A Better Way to Deal With Downturns (Andrew A. Samwick, January 27, 2008, Washington Post)

This "stimulus bill" is really $150 billion worth of some future generation's resources appropriated to finance our own consumption. Why are we entitled to pass on this additional debt?

The imperative to do "something" is all the entitlement politicians need. In political arguments, you can't beat something with nothing. But we can learn from this experience to have a better menu of fiscal policy options the next time around. Two changes to our budget policy would go a long way toward that goal.

First, we should rule out deficit spending to finance a consumption binge. As the economy slows, the deficit will widen even without changes in fiscal policy. But an honest budget policy would be calibrated to balance the budget over a complete business cycle. Years of cyclical deficits will be offset by years of cyclical surpluses. As a corollary, we must not waive pay-as-you-go rules that require spending that increases the current deficit to be offset later, when the economy is stronger.

Friend Samwick needs to consider both the absence of any evidence that a debt the size the leading democracies have been carrying for centuries now (particularly at times of global war) is a negative--especially when you look at household net worth--and the fact that this is the second consecutive slowdown that has come after a considerable decline in the deficit. Indeed, from a purely economic perspective there's no rational argument for paying down the debt, with the low interest rate we pay on it, out of monies on which we make a higher rate of return. As an individual, would you take money out of a stock fund that makes 10% to pay off a loan you got at 3%? You might for aesthetic or moral reasons, but not for economic.

Posted by Orrin Judd at January 26, 2008 10:07 PM