Thursday, October 7, 2010

Time Horizons Again

Neil Irwin:
One more point. In debating economic policy, there is a tendency to conflate two questions. One is what the government should try to do to keep output as close as possible to potential output, to minimize those deviations. The second is what mix of government policies will result in the potential output line rising as steeply as possible in the long run, which is the ultimate source of rising standards of living.

So, for example, Republicans favored the Bush tax cuts in 2001 and 2003 because they view lower-tax policies as likely to lead to steeper increases in potential output over the long run. But they sold them publicly as a way to close the temporary (and, in hindsight, quite small) output gap that existed in those years. And Democrats sold the 2009 stimulus bill as a tool to close the giant output gap that existed then. But many elements of the bill were designed to fulfill long-term policy priorities of the left that, in Democrats' view of the world, are more likely to make for a more steeply rising potential output line.

We could have better debates over economic policy if politicians--and journalists--were clearer about the distinction.

I'm glad Neil mentioned the differing time horizons. You know how FLG loves him some differing time horizons. However, FLG disagrees with "But many elements of the [2009 stimulus] bill were designed to fulfill long-term policy priorities of the left that, in Democrats' view of the world, are more likely to make for a more steeply rising potential output line."

The Democrats put a lot of money toward healthcare and education, which while they have long run economic benefits those aren't the reason why the want to invest in healthcare and education. They invest in them for largely moral and social justice reasons, not economic ones.

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