Potomac Fever is the blog of the Hamilton College Semester in Washington Program.
Does the WSJ remember what government policies occurred in the 1980’s that they think "caused" the post 1982-boom? During the Reagan years the size of government and level of government spending both increased while the Administration simultaneously used supply-side economic theories to justify massive tax cuts… that they then quickly reversed course on after they saw the deficits and debt ballooning to levels not seen since 1946 and 1962 respectively. Oh, and the trade deficit also massively increased during those years, so we weren’t doing too well on exports. In addition, the Federal Reserve had more to do with the economic growth of the time than any Reagan policies. Next, the 1980’s success was largely as a result of the economy actually getting close to its potential output levels after the output gap between the two levels widened during the 1970’s economic malaise and 1982 recession. During the 1980’s the gap declined and the economy moved closer to potential levels with its actual GDP. That will happen again, and there’s no need (or justification) for using supply-side voodoo economics to get us there. We don’t need to worsen deficits from where they are now, nor do we need to endure more wacko nonsense about how tax cuts pay for themselves or are a significant boost to economic growth.
One of the best things the federal government could do for growth is invest billions annually (potentially hundreds over the next decade or two) in basic research and infrastructure. Though timing wise that's probably more of a mid-term boost. Similarly, education reform would be helpful- an issue where both parties actually have good ideas (and awful ideas), and there's a great deal of nonpartisan and wonkish ideas out there as well. But that's a long-term boost to our economy. Boosting exports would be helpful, and the Obama administration has actually been doing a good job there with significant growth in recent years- but our exports are so weakened and small as a share of the economy that it's going to take more than what we've been able to do so far to be effective enough. One good thing we could do is stop or lessen China's currency manipulations. Next, comprehensive tax reform would be helpful (something very different than early Reagan tax-cutting) in the short/mid-term (depending on how quickly they do it, and whether they have the political power to make it happen). However, estimates of the impact of this kind of change are generally overstated (something I’ve read and heard from economists across the political spectrum, including people from AEI for instance). A comprehensive plan for significant deficit reduction over the next decade that stabilizes the debt-to-GDP ratio would be helpful for the economy, though not nearly as much as people think. It's more helpful in heading off any concerns creditors might have about our creditworthiness for at least a decade then it is for prompting growth. We also need to see what we can do about energy- I don't really care where, but we need to wean ourselves off oil because these damned oil price increases keep on dragging our economic recovery down. I'd strongly support a carbon-tax or increased gasoline tax or something similar, even if it was offset in revenue collection by lowered tax rates in other parts of the tax code or somehow redistributed in a modified way to compensate those industrial sectors and parts of the country (read rural) most affected by this kind of tax. See what we can do in the housing sector. We've now had such massive losses for several years that it's wiped out the housing bubble's impact, so there's no need for it to be still stagnating. The HAMP et al. programs have proven insufficient to the scale of the problem, though not ineffective. The state attorney generals’ agreement with the mortgage servicers and such would be helpful, because like it or not but a good deal of the housing sector’s current problems with the foreclosure crises can be laid at their feet. At the same time, we should do what Obama, many Dems, and all Republicans are pushing- modify the housing sector so in the long-run there is less of a government role in this area because it’s proven ineffective and just exposes taxpayers to unnecessary financial risks. Though I would put myself closer to Obama here in that some role for government is still called for, as opposed to what many Republicans are pushing- no government role. Also, keep UI benefits going and consider the Bipartisan Policy Center’s full payroll-tax holiday, though that should be paid for in some way over the long-run horizon. Those provisions would have significant stimulus effect.
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