I Forgot About The Balanced-Budget Multiplier
July 25, 2011 Leave a comment
A view simple concept–if you expand government spending and taxation by the same amount, then there is an equivalent increase in national income. Hence, there is more income, but not more national debt. Great!
I wrote about the concept of the balanced-budget multiplier and of raising taxes and government expenditure by the same amount, dollar for dollar. These ideas were first put on the national stage in 1943 by Paul Samuelson, the Nobel laureate. He argued that such a policy would be one-for-one expansionary: each dollar spent is a dollar of new national income. As long as interest rates are near zero — as they were then and are now — there should be no “crowding out” of private expenditures by government ones.
This is an expansionary change in fiscal policy that won’t require additional increases in the national debt. We should start a dialogue right now about taking such action, before the damage of protracted unemployment worsens.