Monday, April 15, 2013

The Short Run and the Long Run

One of the biggest points of confusion in the deficit debate is the long run versus the short run.  In the long run we have an entitlement driven budget problem that is solvable but politically problematic. In the short run we have a inadequate effective demand problem is that is related to both tax increases (the payroll taxes) and the animal spirits of consumers and investors (which is resulting in weak spending). 

Most analysts want it one way or another.  Conservatives want to deny the stimulus problem and focus on shrinking government. This is not a surprise, a small government has always been their goal. Many liberals believe the entitlement problem is something that we should ignore for now and would instead focus on job creation. 

Obama has it right in his budget proposal.  Stimulate demand now with infrastructure investments that bolster the long-run economy.  But at the same time, agree to future long-term cuts to entitlements. This has the effective of calming markets and perhaps stimulating the animal spirits of capitalists allowing in an additional increase in investment. 

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