THE $858 billion tax package signed into law this month provides some stimulus for our ailing economy. With the unemployment rate at 9.8 percent, more will certainly be needed, yet further deficit spending may not be a politically viable option.
Instead, we are likely to see a big fight over raising the national debt ceiling, and a push to reverse the stimulus we already have.
In that context, here’s some good news extracted from economic theory: We don’t need to go deeper into debt to stimulate the economy more.
For economists, of course, this isn’t really news. It has long been known that Keynesian economic stimulus does not require deficit spending. Under certain idealized assumptions, a concept known as the “balanced-budget multiplier theorem” states that national income is raised, dollar for dollar, with any increase in government expenditure on goods and services that is matched by a tax increase.
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