Sachs: A Fiscal Straitjacket

Jeff Sachs is worried that the stimulus package, especially the components involving tax cuts, will do more harm than good by starving the economy of the revenues needed to fund vital programs:

A fiscal straitjacket, by Jeffrey Sachs, Commentary, Financial Times: The US debate over the fiscal stimulus is remarkable in its neglect of the medium term – that is, the budgetary challenges over a period of five to 10 years. ... Without a sound medium-term fiscal framework, the stimulus package can easily do more harm than good...

The most obvious problem with the stimulus package is that it has been turned into a fiscal piñata – with a mad scramble for candy on the floor. We seem all too eager to rectify a generation of a nation saving too little by saving even less – this time through expanding government borrowing. ..

The White House and Congress have stated an amount – $825bn to be spent mostly over two years... Many of the details of allocating the $825bn are being left to Congress with the aim of reaching a bipartisan consensus. The result is shaping up to be an astounding mish-mash of tax cuts, public investments, transfer payments and special treats for insiders.

What we need is a medium-term fiscal framework, one that lays out an anticipated schedule of taxes and spending consistent with the needs of the economy and government functions. Rather than soundbites about ending pork-barrel projects or scouring the budget for waste, or about the relative multipliers of tax cuts versus spending increases..., we should be reflecting on certain basic fiscal facts, the most important of which is that the US government faces huge and potentially debilitating structural deficits as far as the eye can see. ...

If the present stimulus package is adopted without a medium-term plan, it will ... put the US into a fiscal straitjacket that could paralyze public sector action in critical areas for a decade or more to come. This is especially true if we allow further tax cuts during a time of fiscal hemorrhage, or give into “bipartisan” demands to make the Bush tax cuts permanent, even for the rich, as seems increasingly likely.

There are many valuable things proposed in President Barack Obama’s spending plans – such as the sums to be spent on energy, healthcare and education – but these should be incorporated into medium-term strategies rather than a grab bag of hasty short-run spending. The tax cuts that he is likely to approve..., and the extension of Bush-era tax cuts if that comes to pass, could close the door to these longer-term programs; haphazard spending on these vital programs could do the same. ...

[T]here is certainly a cyclical case for deficit- financed public spending, but accompanied by phased-in tax increases to provide proper financing of crucial government functions in the medium term.