Alan Blinder: Stimulus Isn't a Dirty Word

By ALAN S. BLINDER

A debate now rages in Europe over whether fiscal austerity—that is, higher taxes and less spending—helps or hinders growth. That's progress of sorts. Not long ago, European policy makers seemed stuck on the notion that austerity promotes growth. Yes, we were supposed to believe that countries grow faster when their governments spend less and tax more.

Events in Europe seem to have dashed that idea. But a similar debate rages here in the U.S.—with the lone exception that our pro-austerity crowd abhors tax increases. It's a highly partisan debate, too, the sort that an election should decide.

Many Democrats, including President Obama, want to help state and local governments maintain their spending, which has now dropped 6.4% since its 2008 peak—and is still falling. Most Republicans reject that idea, even when it saves the jobs of teachers, fire fighters and police officers.

Many Democrats also want to build and repair more roads, bridges, tunnels and the like—taking advantage of the rare combination of historically low government borrowing rates and historically high unemployment among construction workers. Most Republicans reject that idea, too, even though the argument for more public capital is the same as the argument for more private capital—each promotes growth.

Democrats also typically seek a growth strategy that boosts the incomes of the middle class, not just of the top 1%. Many Republicans counter that the most effective way to bolster middle-class incomes is via trickle-down from the rich—who start and grow businesses.

Politics aside, suppose we actually got serious about a pro-growth agenda based on logic and facts rather than on partisan ideology. What would it look like? Here are a few ideas:

• Budget policy. For openers, as I advocated in these pages last month, we need a two-pronged fiscal package. In the near term, we need modest stimulus, focused tightly on creating jobs. But that stimulus should be paired with a vastly larger dose of long-run deficit reduction—perhaps 10 to 20 times as large as the stimulus—over the 10-year budget window.

Economically, this can be done; it's not even that hard. But if Republicans continue to reject even deals comprised of $10 of spending cuts for each $1 of tax increases, it's hard to see how we get there politically.

• Private investment. Republicans are right that business investment is the key to growth. Fortunately, business investment has done very nicely, thank you, despite the sluggish economy—growing 8.4% over the past year and at an annual rate of 10.8% over the past two years. (The corresponding growth rates for GDP were about 2%.) So while there's always room for improvement, business investment is not part of the problem. The best thing policy can do for private investment is to get the overall economy growing faster.

• Public investment. Unlike private investment, inadequate public investment is part of the problem. America's infrastructure needs are so huge, and so painfully obvious, that it's mind-boggling we're not investing more. The U.S. government can now borrow for five years at about 0.75% and for 10 years at about 1.7%. Both rates are far below expected inflation, making real interest rates sharply negative. Yet legions of skilled construction workers remain unemployed while we drive our cars over pothole-laden roads and creaky bridges. Does this make sense?

• Education. Everyone knows that the returns to education, while large, are long delayed. That means we have no time to waste. We should be doing a much better job of building a better educated, more productive work force for the future. A Council on Foreign Relations task force co-chaired by former Secretary of State Condoleezza Rice and former New York City Schools Chancellor Joel Klein recently argued that better K-12 education is critical to American leadership in the world and therefore to our national security.

That idea is neither new nor partisan. Where things do get partisan is in choosing between working harder on traditional public schools versus relying on vouchers, charter schools and the like to provide competition. Here, the research is interesting. It suggests that, on average, charter schools perform neither better nor worse than public schools.

• Tax reform. Finally, we could reap a small growth dividend by moving to a smarter, simpler, less distortionary tax system. Both parties agree that the current tax code is a disgrace, but that's about where bipartisan agreement on taxes ends.

Republicans often focus on lowering the top income tax rate. Just like Gingrich Republicans did in 1993, Romney-Boehner Republicans now want us to believe that the success or failure of the U.S. economy hinges on whether the top bracket rate is 39.6% (which President Obama prefers), 35% (where it is now), or 28% (as in Mitt Romney's proposal).

But the evidence is against the GOP on this one. We've experimented with moving the top rate up or down a few percentage points several times. Under President Clinton in 1993, we raised it to 39.6% from 36% and one of the greatest periods of prosperity in U.S. history followed. Then in 2001, under President George W. Bush, we cut the top rate to 35% from 39.6% and . . . well, you know what followed.

Why in the world are we still arguing about this? Our focus, instead, should be on devising a fairer and more neutral tax system in which decisions regarding the allocation of resources are made by individuals and businesses, not by Congress.

So let's see. If we are serious about an evidence-based program that spurs growth and improves the lots of average Americans, we should want a near-term jobs program, long-term deficit reduction, more spending on infrastructure, improvements in education, and a tax reform that clears out loopholes, returns to the 39.6% top rate, and protects the middle class.

Which candidate does that remind you of?

Mr. Blinder, a professor of economics and public affairs at Princeton University, is a former vice chairman of the Federal Reserve.