Shiller On How To Provide Stimulus Without Higher Deficits

The need for stimulus and the reluctance to increase the national deficit — it’s these two concepts that many feel are leaving the U.S. in an untenable position. But Yale Economist Robert Shiller says there is a way to provide stimulus without increasing the national deficit.

“A critical fallacy … has crept into our thinking: We have become habituated to the idea that Keynesian fiscal stimulus has to take the form of deficit spending,” Shiller writes in a piece for The New Republic. “After a credit downgrade by S&P, there’s a strong argument to make that the U.S. government is in no position to make a massive further increase in the national debt — but that’s not an argument against stimulus as such. The fallacy is to think that stimulus necessarily needs to run up the national debt.”

The solution, says Shiller — who called both the bursting of the tech bubble and the bursting of the housing bubble — is to raise both government spending and taxes by the same amount. “The idea that balanced budget increases could save an economy stuck in a bad equilibrium goes back to the work of economists Walter Salant and Paul Samuelson in the 1940s, and it’s been taught in introductory economics courses ever since, though somehow it has been absent from public discussion of the current economic situation,” Shiller says.

Shiller talks about some of the concerns people might have about a balanced-budget stimulus program, and how and why they can be managed. He also talks about the psychological component of the economy, and how psychology makes additional stimulus necessary right now. “We first have to come to grips with the fact that we need stimulus because we’re facing a problem of inadequate aggregate demand, a concept that we owe to the work of John Maynard Keynes,” he says. “Keynes pointed out that a national economy can get stuck in a bad equilibrium — as it had in the Great Depression in 1930 — where unemployed people really wish to supply their labor to some employer, but employers won’t hire them because they don’t think that the extra product they would make could be sold. Why not? Because of all the unemployed people trying unsuccessfully to supply their labor who can’t afford to buy anything. And why aren’t they working? Because no one will hire them.”

If that seems like circular logic, it should. “The core idea of Keynes’ theory is that there’s no fundamental reason to be in such a weak economy except the fact that we’re in it,” Shiller says.

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