Friday, January 16, 2009

The Future of Fiscal Policy?

The following Keystone Economic Principles are related to today's post:
1. We all make choices.
2. There ain’t no such thing as a free lunch.
3. All choices have consequences.
4. Economic systems influence choices.

There is a thought-provoking piece on the second page The Wall Street Journal today. It basically outlines the policy choice facing the incoming administration. And I think it does a good job.

The author refers to a "Grand Bargain" - the long-term cost of the short-term stimulus that is on the horizon. I'm starting to see more discussions of this type - the upshot of which is this: Tax cuts and spending increases are probably inevitable. Given that, once the economy is on the mend, what's the next step?

I find the question interesting because of the current interest in Keynesian economics. Keynes was brilliant. He did believe that government policy could be used when the economy went into a deep recession. But he also felt that once the economy recovered, policy called for a reversal or a dropping of the programs put in place and the return of balanced budgets (balanced meaning generate surplus to offset the previously imposed deficits). That would seem to indicate a return to higher interest rates, higher taxes, and a return to reduced spending. Do we think policy-makers can follow through? It would seem some rough choices are lurking in "the long run." I think this could be a good article to use as a discussion starter on Tuesday. What are your thoughts?

Have a good weekend.

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