Fiscal Policy in an Era of Austerity

Article excerpt

I.   THE NEED FOR A POLICY AGENDA TO
     PROMOTE ECONOMIC GROWTH
     A. Deleveraging Hangover for Consumers
     B. Ballooning Government Deficits
     C. Intense International Competition
     D. Promoting Economic Growth
II.  UNCERTAINTIES AND CHALLENGES WITH
     A KEYNESIAN STIMULUS
     A. Dueling Models and Multipliers
     B. The Challenge of Identifying
        "Shovel Ready" Projects
     C. The Problem of Politically-Motivated
        Projects
     D. The Costs of Deficits
III. TACKLING PROBLEMS OF SUBSTANTIVE LAW:
     THE EXAMPLE OF CUTTING
     CORPORATE TAX RATES
     A. Addressing a Broad
        Range of Problems
     B. The Case Study of
        Corporate Tax Reform
IV.  TACKLING PROBLEMS OF PROCESS:
     PROMOTING BETTER FISCAL
     DECISIONMAKING
     A. Problems of Information and
        Political Incentives
     B. Institutional Strategies to Promote
        Better Fiscal Decisions
        1. Disclosure and Outside
           Fiscal Watchdogs
        2. Institutional Reform
       3. Hard Budget Constraints

CONCLUSION

We face a time of stagnant economic growth, severe unemployment, massive budget deficits, and an increasingly competitive global economy. These daunting challenges are the legacy of a number of unwise policy decisions in both the public and private sectors. Although the good news is that unsound policies can be changed, the bad news is that no single step will do the trick. It is a challenge to rely on monetary policy when interest rates are near zero. There also is uncertainty--and a heated debate among economists--about the effectiveness of a Keynesian stimulus. One thing we know is that a stimulus is quite difficult to execute effectively. For example, it is a challenge to identify "shovel ready" projects that contribute to long-term economic growth, particularly on short notice.

There is no uncertainty, though, about the need to address a broad range of specific problems contributing to our economic woes. We have to promote economic growth and fiscal stability over the long term. To do so, we should reform our housing and mortgage markets, our entitlement programs, our tax code, and much more. A short Article for a special issue cannot delineate all the challenges Congress is facing or provide definitive guidance about how to address them. As an illustrative example, this Article emphasizes the perils of maintaining the highest corporate tax rate in the Organisation for Economic Co-operation and Development (OECD) in a competitive global economy. Cutting our corporate tax rate would encourage businesses to invest and hire more employees, while also reducing incentives to engage in wasteful tax planning and to shift taxable income and jobs overseas.

In addition to the problems with our substantive law, we also face problems of process that undercut our government's effectiveness. An important (and familiar) one is that politicians are consistently tempted to accommodate organized interest groups, especially if the costs of these favors can be quietly passed on to the general public. This is all the more true if special interest deals can be financed with deficit spending, so that the bill will not come due until long after our current political leaders have retired. Various measures can constrain this familiar political dynamic, and this Article sketches three strategies as illustrative examples. First, we should make the costs of special interest deals more visible through better budgetary accounting. Second, we should enlist specific institutions within our government to target waste and pork. For example, we should empower special House and Senate committees to cut particular budget items or, alternatively, to sever them from the rest of the budget and subject them to a separate public vote. Third, we should create stronger institutional barriers to deficit spending. Scarcity focuses the mind, so that our leaders will have greater incentive to reject initiatives that are not cost-justified. …