martes, 17 de enero de 2012

Stimulus without a budget deficit...

Yes, it's conceptually possible to stimulate the economy without engaging in deficit spending. How? The "balanced budget multiplier theorem" is how. Essentially, any increase in government spending on goods and services that is matched by a tax increase raises national income, dollar for dollar.

Robert Schiller, of Case-Schiller Index fame, explains how the multiplier works: "On average, people’s pretax incomes rise because of the business directly generated by the new government expenditures. If the income increase is equal to the tax increase, people have the same disposable income before and after. So there is no reason for people, taken as a group, to change their economic behavior. But the national income has increased by the amount of government expenditure, and job opportunities have increased in proportion."

The problem, of course, is that taxes have to be raised and the distribution of the costs and benefits of the measure. Still, it's a concept that could be of great utility in countries in Europe and the western hemisphere.

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