Let’s leave aside the larger questions having to do with how and why the US economy got into the current bind—global imbalances, the political economy of investor hegemony, etc.—and look only at the immediate fiscal and employment effects. What’s wrong with Peter Orszag’s suggestion in today’s New York Times that the demands of the short run output gap and long run fiscal sustainability can be met by extending the Bush tax cuts for another two years, but written in disappearing ink, with a mandatory end after that?
Simple: he forgot the balanced budget multiplier. He could accomplish much more of the first goal without any cost to the second by proposing a different plan: end the tax cuts immediately while simultaneously appropriating an equivalent amount of money to a fund that could be spent on various public projects or simply rebated to the states to reduce their own program cuts. If he thinks two years is the magic timespan, he could write in two years’ worth of the revenue increases due to ending the tax breaks. The economics that every introductory students learns, and which is in fact unassailable, should tell him that the stimulative effect of an equal dose of higher taxes and higher spending is greater than the equivalent of reduced taxes and reduced spending. Of course, this difference is even greater in the case of the Bush tax cuts, which were overwhelmingly tilted toward high-income households with a much lower marginal propensity to consume. (And I leave out equity considerations, which are not supposed to infect macroeconomic analysis.)
Note to instructors: clip this op-ed and use it in class after you cover fiscal policy. See how many students can outsmart this former head of the CBO and OMB. I realize this is setting the bar a bit low, but they might still get a charge out of it.