Only A Balanced Budget Stimulus Can Create Sustainable Economic Growth

December 16, 2013

Tighten the budgetEarlier today, the United States Department of Labor released the weekly unemployment claims figure, an increase of 68,000 unemployed people compared to last week. Surely, the continuous government stimulus in terms of quantitative easing (QE) and various other “fiscal stimulus” isn’t helping the U.S. economy to get back on its feet at a pace that some economists would like.

Robert Shiller, the distinguished economics professor from Yale University, believes that the U.S. economy desperately needs more government stimulus. However, doing so will result in an unacceptable increase in the national deficit, and the political system is simply not ready to afford that. According to him “the very term ‘fiscal stimulus’ has been tainted.” While the monetary policy based stimulus (QE) reflects the overdose of a drug in terms of “cheap money,” the fiscal stimulus represents mounting national debt.

Yet, Mr. Shiller believes that stimulus, in reality, can be provided to the economy from a balanced budget without raising the national debt level or creating further inflation from all the quantitative easing. Actually, economists like Walter Salant and Paul Samuelson in the 1940’s demonstrated how governments can bring the economy out of stagnation by creating a balanced budget. In their work, they suggested that government raise expenditures to stimulate the economy; but instead of printing money or borrowing, they can simply raise taxes. These two economists argued that during weak economic prospects, the balanced budget based expenditure will create a one-for-one increase in national income and provide enough stimulus to boost real GDP.

In fact, theory of balanced budget can actually create more prosperity—the sum of all government stimulus. For example, if the government raises taxes and invests in the economy, it will create jobs for the unemployed. Once people have jobs, then they are certainly going to spend more, as consumer confidence will go up.

On the other hand, the currently employed people will be paying more taxes with the balanced budget. However, since most people are habitude to a certain type of lifestyle, they will not be decreasing their household spending drastically. Also, since taxes will be higher, it will not create unnecessary inflation in the economy to the point that the Federal Reserve needs to increase interest rates to cool it down.

Although, the balanced budget stimulus is a viable economic solution, the problem to implement it in the United States is purely political. The conservative opposition to tax increase has been well documented to be one of the major obstacles to implement a balanced budget stimulus to create jobs and bring the economy out of the current stagnant state. The viewpoint from both sides of the political spectrum has to converge somewhere to apply the age old wisdom of the balance budget stimulus to create jobs for those who are looking for jobs. Or else, the unemployment claims will keep going up every week, which will create further drag to the economic recovery of this country.



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