A really good column in the Fiscal Times today from economist Mark Thoma: How to Reduce Political Gridlock and Boost the Economy
A simple statement about the widespread believe that fiscal policy is an important tool to combat recessions:
It’s not that the two sides disagree on the ability of fiscal policy to impact the economy. Some Republicans oppose fiscal policy of any type, but for the most part conservatives readily advocate tax cuts to stimulate a lagging economy. In addition, they speak up loudly about job losses or gains when the discussion is about defense spending, and their concern about the economic impact of the fiscal cliff is further evidence that they believe that both spending and taxes matter for economic activity.
If both sides agree that taxes and spending can be used to offset recessions, then why can’t we use fiscal policy more effectively?
A big reason is disagreement over whether government spending or tax changes should be the main tool of fiscal policy. However, this is just a reflection of a more fundamental ideological difference about the size and role of government, and the worry that the other party will use recessions as an excuse to impose its ideological beliefs.
And Thoma’s straightforward recommendation:
This suggests a proposal for fiscal policy. When there is an official, NBER declared recession, each political party should be allowed to implement government spending or tax changes that it desires (within predetermined bounds, and with additional rounds if necessary). But the policies must be budget neutral overall and they must not change the level of spending or taxes in the long-run. If either side wants to try to make the spending or tax cuts permanent later, there is no way to prevent that, but the default position in the legislation must be no long-run changes.