Debt Reduction May be the Best Stimulus of All
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In December the Simpson-Bowles Debt reduction Commission (formally called the National Commission on Fiscal Responsibility and Reform) is slated to issue a set of recommendations addressing the long deficit and entitlement challenges faced by this country. We understand that the commission members are cautiously optimistic that they will actually get a set of recommendations with broad support - something that no one would have predicted 6 months ago. If it happens, then tremendous credit will need to be given to not only Alan Simpson and Erskine Bowles, but also every member of the commission who votes to do the right thing rather than the easy thing.
Conventional wisdom among economists will be that addressing our long-term fiscal challenges won't do much, if anything, to help with our current recession. After all, the problems (and solutions) will all be long-term - and will necessarily involve both tax increases and massive reductions in government spending. None of these things are normally considered "stimulative" in the pure economic sense. In fact, I fully expect to hear from many left-wing economic types that deficit reduction is the last thing we need as a country (!).
However, I am going to suggest that this is yet another area where both conventional wisdom and economists (particularly of the left-wing variety) are wrong. We face a broad array of economic challenges at the moment: a major decline in overall personal wealth, an unwillingness of other countries to stimulate their domestic demand and incredible uncertainty about the future regulatory and tax environment. Overlaying all of this is a major crisis of confidence among the American people, business leaders included. Can the U.S. win again? Can we find a way out of our huge, seemingly intractable problems and once again be the driver of world prosperity? Are our best days behind us? Anyone fretting over those questions isn't planning for investment and growth. And without private sector investment we won't get the 20 million new jobs we need in the U.S. over the next 10 years.
Now, imagine if you will, that we took our biggest and most politically intractable domestic problem - long term deficits and entitlement reform - and solved it! Not solved it completely or immediately, but adopted a reasoned compromise plan that gave high assurance that long-term deficits would be dramatically reduced over next several decades. All of the sudden, the future of the U.S. doesn't look so bleak. We would have a reasonable fiscal outlook (unlike Europe), a favorable demographic outlook (unlike Europe or China), some of the best creative talent and entrepreneurs in the world and continued access to tremendous natural resources. Where would you want to put your money then? Maybe, in fact, the pain of long-term deficit reduction could lead to a large short-term economic gain.
The bottom line is that confidence and optimism matter - a lot - and the Simpson-Bowles Commission could give us a great shot of both.