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History Shows U.S. Can Stimulate Now, Cut Later

Author: Peter R. Orszag, Adjunct Senior Fellow
May 22, 2012
Bloomberg.com

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From 2017 to 2022, Social Security's normal retirement age is scheduled to gradually increase to 67. And I'll bet that not only happens as planned, but does so with little fanfare -- which is pretty much what happened several years ago when the age rose from 65 to 66.

Therein lies an important point: When policy makers put in place measures carefully designed to reduce the federal deficit in the future, most of them happen. This is a good thing, since enacting more stimulus today and more deficit reduction to take effect later is exactly what the U.S. needs.

It's also what makes the ongoing jobs-versus-austerity debate so frustrating. What we really need is to be bolder on both jobs and austerity, by pursuing a combination policy.

Additional stimulus is required because the labor market remains extremely weak. Delayed deficit reduction is also needed to reduce uncertainty over how the federal government will navigate its perilous fiscal path -- and to boost the chances of enacting more stimulus despite the looming debt limit.

To appreciate the potential of the combination approach, look no further than the plan offered by the Domenici-Rivlin debt-reduction task force, which proposed more than $600 billion in stimulus in one year -- far more than I have seen from any serious proposals for a naked stimulus (not linked to deficit cutting). What's most remarkable about the upfront stimulus in Domenici-Rivlin is that it was supported by Republican task- force members, because it was combined with delayed deficit reduction. When was the last time you saw Republicans embrace such a large stimulus proposal?

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