Tags: Blinder | deficit | short | growth

Blinder: Enact Laws That Will Reduce Budget Deficit 'Years Down the Road'

By    |   Tuesday, 09 July 2013 08:08 AM EDT

The United States clearly needs to cut its budget deficit, but not in the short term, because the economy is too weak, says former Federal Reserve Vice Chairman Alan Blinder.

The budget deficit totaled $1.1 trillion in fiscal 2012, which ended Sept. 30, and the economy grew 1.8 percent in the first quarter.

"In the short run, deficit reduction slows growth by cutting the economy's total spending," he writes in The Wall Street Journal. "After all, to reduce its deficit, the government must spend less itself or tax people more."

Editor's Note:
The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

This year's tax increases and spending will probably slash gross domestic product growth by about 1.5 to 2 percentage points, Blinder predicts.

To be sure, "in the long run, a larger accumulated public debt probably spells higher interest rates, which deter some private investment spending," Blinder writes. "Economies that invest less grow less.

"Thus, paradoxically, reducing the budget deficit probably hurts growth in the short run but helps it in the long run," he adds.

So what does this mean for present policy?

"Don't reduce the deficit too aggressively right now, while the economy is still weak and needs all the spending it can get," Blinder argues. "Instead, enact laws today that will reduce the deficit substantially, but several years down the road, when the economy will presumably be stronger."

For now the government should cut taxes, increase spending and maintain an easier monetary policy to boost growth, Blinder contends.

International Monetary Fund Managing Director Christine Lagarde agrees with Blinder on budget policy.

"The budgetary procedure that is in place in the United States, which leads to a budgetary adjustment, seems to us absolutely inappropriate," she said at a conference Sunday, Reuters reports.

That's because "it blindly affects certain expenditures that are essential to support medium- and long-term growth."

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

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Economy
The United States clearly needs to cut its budget deficit, but not in the short term, because the economy is too weak, says former Federal Reserve Vice Chairman Alan Blinder.
Blinder,deficit,short,growth
323
2013-08-09
Tuesday, 09 July 2013 08:08 AM
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