Committee for a Responsible Federal Budget

Steuerle Joins the Announcement Effect Club

Jul 16, 2010 | Economics

CRFB board member Eugene Steuerle joined the Announcement Effect Club in a post on the Urban Institute's website. In the post, he talked about the need to separate the difference between our short-term deficits and our medium-term structural deficits. First, the main quote:

Finally, there's a bonus in handling the first, short-term problem by starting to solve the second, long-term problem immediately: it gives greater assurance to the markets that countries are going to get their fiscal houses in order. Many solutions to long-term fiscal problems—such as reducing powerful incentives to retire—could also be designed to boost recovery.

As he points out, there's no need to wait to develop a plan, since there obviously can be a lag between when a policy is enacted and a policy is implemented. Because of this lag, he says, "The economics always [say] we should adopt and maintain good long-term budget policy as soon as possible, even when we disagree on the timing of short-term stimulus." Since a medium-term deficit reduction plan would have little, if any, contractionary effect in the short term, enacting one now makes economic sense, especially since a credible plan would reduce upward pressure that fears of excessive debt could have on long-term interest rates.