How to Create Stimulus Without Adding Debt

Yale economist Robert Shiller says the U.S. shouldn’t forget that it is possible to provide more economic stimulus without actually adding more debt.

In an op-ed piece for The New York Times, Shiller discusses the “balanced-budget multiplier” theory, which maintains that national income is raised, dollar for dollar, with any increase in government expenditure on goods and services that is matched by a tax increase.

“The reasoning is very simple,” Shiller says. “On average, people’s pretax incomes rise because of the business directly generated by the new government expenditures. If the income increase is equal to the tax increase, people have the same disposable income before and after. So there is no reason for people, taken as a group, to change their economic behavior. But the national income has increased by the amount of government expenditure, and job opportunities have increased in proportion.”

Shiller says the balanced-budget multiplier first got major attention in the latter stages of World War II, a time when there were worries that a second Great Depression could occur after war-time stimulus was withdrawn from the economy.

There are factors that could impact the balanced-budget multiplier — like people’s emotional responses to new tax hikes. But Shiller says the balanced-budget multiplier is generally easier to predict than the deficit-spending multiplier. “If the government spends the money directly on goods and services, that activity goes directly into national income,” he writes. “And with a balanced budget, there is no clear reason to expect further repercussions. People have jobs again: end of story.”

Shiller also says he thinks people could be willing to accept a tax increase at some point, if the benefits are clearly laid out. “It’s conceivable that an effective case will be made in the future for a new stimulus package, if more people come to understand that a few years of higher taxes and government expenditures could fix our weak economy and provide benefits like better highways and schools — without increasing the national debt,” he says.

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