## Worst-of-Both-Worlds Fiscal Policy

For a couple of years now--ever since we slammed into the zero nominal interest rate lower bound--I have been wandering around saying:

The obvious policy is the long-term debt neutral stimulus: spending increases and tax cuts for the next three years, standby tax increases with triggers and spending caps with triggers thereafter, all calculated to guarantee that the debt is no larger ten years from now than in the baseline.

I haven't found takers--even though those who believe in stimulus spending should think that the short-run gain outweighs the long-run pain, those who believe in confidence think that the long-run pain is good for us and worth the short-run bacchanalia, and the thing should pass unanimously.

Ezra Klein has related thoughts

Worst-of-both-worlds fiscal policy: A lot of the debate over deficits right now comes down to how you feel about interest rates. Normally, interest rates should be a conversation-ending indicator. If our deficits are too high, interest rates on government debt should be high, too, as that's how the market would compensate for the risk that we won't pay people back. But interest rates, of course, are very low. Even historically low. That should mean that our deficits aren't a problem, at least not in the short term. That's the stance taken by Paul Krugman and Brad DeLong. But... some people think that... [r]ather than showing us that we don't have a problem, our low interest rates... are masking the fact that we do.... The market may be dumb, but it's not completely insane. The government has about $12 trillion in total debt right now. And that, on its own, is actually okay: It's the rapid growth of entitlements in the future that poses the real problem. Amid all that, a single-year charge of$100 billion is such a vanishingly small addition to our long-term debt that neither including it nor deleting it is going to have any effect on our fiscal condition....

Creating a lot of uncertainty about our deficit might be enough to push people away from stimulus, but it seems far from enough to do anything about our long-term deficit. It seems we're getting the worst of both worlds: The argument over deficits is keeping us from doing what we need to do to help the economy grow right now, but it isn't going to be enough to get us to do what we need to do to help the economy grow later, either. And the outcome of that could be ugly: If growth is anemic when the eventual fiscal crisis does come, that's going to make a response much, much harder.