The CBO Reveals The Only Policy Option We Have Left To Deal With Unemployment


The recovery has failed to materialise for millions of Americans, who are now looking to things like quantitative easing 2 to somehow stimulate the economy.

But nobody thinks that’s really going to work. Even CBO chief Doug Elmendorf is a doubter.

The Congressional Budget Office, under his direction, has put together a presentation explaining how fiscal stimulus now could drive employment. And then, later, when the economy and its consumers have recovered, we can put on the brakes and control government debt.

This argument has much in common with those made by economists like Richard Koo, who suggests quantitative easing, without demand for funds, is largely useless and that, instead, the government must demand those funds in the interim. Paul Krugman has also made similar arguments for fiscal stimulus.

The recovery is clearly not robust enough to create jobs.

The unemployment rate will start to fall, but it will take time.

States impacted by the real estate crisis are in the worst-shape labour-wise.

And the long-term unemployment rate is near recent highs.

We're, in some ways, out of bullets on the monetary side.

So fiscal stimulus may be the best option.

But it's difficult to tell what policies will work best.

The Recovery Act did help some...

It is going to cost serious cash to make a dent in growth.

Tax policy changes seem to have some sincere benefits.

Increasing costs permanently is not an option.

And the permanently extending the tax cuts is a perfect example of that.

Real GNP could see a serious boost from tax cuts.

But those same cuts will drag down GNP in the future.

And beyond growth, debt is a problem.

The deficit increases with the tax cut extension.

If we want fiscal stimulus now, we must make future austerity law.

Fiscal stimulus must be coupled with long term austerity plans.

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