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A "Short Term" Increase in the Debt Ceiling

4:37 PM, Dec 15, 2009 • By MATTHEW CONTINETTI
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Let's say the health care debate is resolved, one way or another, by the end of the year. Which issues will dominate 2010? The top candidates at the moment are jobs and the deficit. On jobs, President Obama laid out his thoughts in a speech last week to the Brookings Institution.

On the deficit, it looks like House Democrats are bowing to pressure from deficit hawks and will pass a short-term increase in the debt ceiling, rather than the permanent large increase they were hoping for. The shift, Paul Kane reports, came about because "conservative House Democrats had been demanding, in exchange for their votes to support a large debt limit increase, a law that would force new spending on government programs to be offset by other cuts in federal spending or increases in taxes or fees." That was too much for the Democratic leadership, it seems.

The two issues are related, of course. Keynesians like Paul Krugman and Joseph Stiglitz believe the only way to create new jobs and spur employment is through direct government spending. But such spending would create even larger deficits and add to an already high national debt. The headwinds against such drastic spending increases are too strong, as evidenced by Pelosi and Hoyer's capitulation on the debt ceiling vote. Unfortunately for the Democrats, therefore, the likely outcome is political gridlock, an unemployment rate higher than the one on Election Day 2008, and gains for Republicans in next year's midterm elections.

If the Democrats were smart, they would read Greg Mankiw's op-ed in the Sunday Times, where he points out that "successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending." Shoving money out the door to select interest groups, Mankiw says, has a negative effect on private spending and investment. The number of government jobs increases. But the number of start-up companies that promote growth does not.

A "second stimulus" of tax cuts on capital gains, corporations, and employer payrolls would add to the deficit, for sure. But it would also be more likely to return the American economy to a place where the president and Congress could enact sensible tax and spending policies. The alternative is to persist in spending programs and temporary tax cuts and rebates, suffer through a "jobless recovery," and hope that the American jobs engine restarts on its own.