Legal Commentary

Tyler Cowen on the ?Fiscal Illusion?

By Jonathan H. Adler

In today?s NYT, Tyler Cowen discusses the fiscal illusion, and eventual reckoning.

Keynesian economics talks of the ?fiscal illusion? created by government debt: the issuance of such debt can stimulate the economy in the short run by encouraging a false perception of wealth and thus bolstering consumer spending. But, eventually, the books must balance. There is then a fiscal crunch, a sudden retrenchment of plans and great rancor over budgets, as we have been seeing lately at both the federal and the state level.

The famous Keynesian rejoinder, ?In the long run we are all dead,? is less comforting when that long run comes into sight. Short-run planning is a hard carousel to stop, especially when there are frequent election cycles, but the federal government must act soon. Limiting Medicare and Social Security spending involves re-indexing benefits, adjusting eligibility ages, shifting the growth rates of costs and making other changes that have their full fiscal impact only over the longer run.

Yet we are postponing even these actions. Experts? recommendations might lead us toward a fiscal smooth landing, but at this point the fiscal illusion ? and not the advice of experts ? is in control.

Cowen has more here.

Full post as published by The Volokh Conspiracy on March 06, 2011 (boomark / email).