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Nov 30 / Jonathan

Dean Baker: stimulate for the kids

It’s a long story; go read the whole thing.

Mankiw Promulgates Confusion on the Debt at the NYT

Greg Mankiw must know better than he indicates in his analysis of the debt in today’s NYT. He complains that efforts to use large-scale stimulus to boost the economy may put excessive burdens on our children.

So, in the stimulus story, we have handed our kids a more productive economy than in the no stimulus story. We also may have created an economy in which tax distortions are somewhat larger (although the plunge in stock values means that after-tax returns are likely to be far higher in the future even with higher tax rates, than they were in the pre-crash years), but any plausible measure of the distortions resulting from the additional tax burden will be dwarfed by the addition to GDP resulting from the stimulus. (If the tax distortions are equal to 25 percent of the tax collections, then they will be equal 0.0225 percent of GDP [25 percent of 0.09 percent]. The stimulus permanently raised output by 0.45 percent.)

In short, if we think about our kids, we should do the opposite of what Mankiw argued. We should support a big stimulus package that is focused on investments for the future. This is essential for sustaining the economy now and it will help our kids for decades to come.

—Dean Baker

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