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One Nation, Two Deficits

Author: Peter R. Orszag, Adjunct Senior Fellow
September 6, 2010
New York Times

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The nation faces a nasty dual deficit problem: a painful jobs deficit in the near term and an unsustainable budget deficit over the medium and long term. This month, the Senate will be debating an issue with significant implications for both ó what to do about the Bush-era tax cuts scheduled to expire at the end of the year.

In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.

Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.

Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets don't seem at the moment to view the budget deficit as a problem ó take a look at the remarkably low 10-year Treasury bond yield ó there is little reason not to extend the tax cuts temporarily.

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