Thursday, September 9, 2010

Boehner’s Two-Step Job Destruction Plan

Ezra Klein rightfully criticizes what he calls John Boehner's stale 'two-step job creation plan' as something that could lead to larger long-term deficits. But let’s look at what the likely effects would be for the current weak economy. Step 1 would be to roll back Federal spending by almost $100 billion per year.

The difference in what Boehner as his step 2 is proposing versus the President is proposing amounts to a difference in tax collections from the very rich that is less than $100 billion per year. If we took the Peter Orszag proposed political compromise and extended these tax cuts for the very rich for only a couple of years, we would have a temporary tax cut for the well to do who are not likely liquidity constrained The life cycle model says most of this will be saved with very little aggregate demand impact. The Ricardian Equivalence extension of this model says all of it will be saved with zero aggregate demand impact.

Combining the two steps – we would clearly have a reduction in fiscal stimulus and hence a reduction in aggregate demand. The Boehner proposal is therefore not a job creation plan but rather a recipe for another recession.

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