Fiscal Neutrality

Today Pelosi and the Democrats newly minted in congress agreed to ressurect the idea of Budget neutrality. The idea is simply that for any mandatory spending increase (Medicare...) or tax cut, either would be offset by spending cuts or tax hikes to maintain budget neutrality.

I'm torn about this idea. On the one hand, I admire it as a postive step to try to quench the sick idea that somehow we can have our cake and eat it too. In essence, it recognizes that starving the beast (see one of my previous posts - the idea that a tax cut that results in a current budget deficit will have the effect of reducing future spending thereby natuarlly bringing the deficit back to neutral) just doesn't work. In fact, it is a rule that will essentially pull the beast's feeding tube anytime congress wants to enact a tax cut (it will have to be offset by a reduction in future spending or tax increases elsewhere).

That said, I understand the Republicans' point that this will make using fiscal policy and enacting tax cuts more difficult. What I'm not so sure about is that that is such a bad thing in and of itself. Not all tax cuts are created equal.

No, the thing that is of interest to me the most about this is that this rule essentially renders fiscal policy (for the most part) moot. If a policymaker felt we were in a recession and he/she thought we could cut taxes to help spur the economy, that tax cut, according to the new rule(s), would have to be met quickly with a tax increase elsewhere or a spending cut. But, as we know, that would counteract much (depending on the relative effects on the economy of each) of the "kick" the original tax cut provided.

But is rendering fiscal policy moot a problem? To me, not really. Most economists today agree that monetary policy is a much more stable and independent way of having a soft-landing recession, or to cool off the economy in times of fast inflation. And one big benefit of this budget neutral proposal would be that it would force the congress to really prioritize and to recognize those spending programs / tax policies that aren't working, and compare them to those that are.

So in closing, I support the Democrat's plan - though perhaps it is not ideal, and perhaps it is biased against the tax side of the equation - but it is a great first start, and quite frankly is a refreshing change from the neo-Republicans' faulty laffer-based economics of cut taxes and spend out the rear.