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Finding Middle Ground In The Economic Debate

Concern that the U.S. economic recovery is faltering has ignited a furious political debate over how the government should respond. Democrats are arguing for more stimulus. Republicans say reducing the federal deficit is the cure. Both argue the other's medicine could send the country back into recession -- or depression.

But a couple of prominent economists from each side are counseling a more nuanced approach.

The Importance Of Subtlety


There's little middle ground in the political argument over whether the economy needs more stimulus or fiscal discipline.

"The Republicans come to us now and say, 'We've got to stop putting money back into the economy -- it creates a deficit,' " said Majority Whip Dick Durbin on the Senate floor. "Yes, it does. But if you don't get the 14 million unemployed Americans back to work, the deficit will get worse."

Cancel the current stimulus program and replace it [with] a program that will work. And that's a program that cuts corporate taxes.

Senate Republican leader Mitch McConnell had this response: "What we're not willing to do is to use worthwhile programs as an excuse to burden our children and our grandchildren with an even bigger national debt than we've already got."

Alan Blinder, an economic adviser to President Clinton and former vice chairman of the Federal Reserve, says the situation requires subtlety. "But subtlety doesn't come through in political debates," he says.

Blinder says the truth is, the country needs both more stimulus and deficit reduction -- but in different time frames.


And he has some notable company from the other side.

A Stimulus Not From Spending

"My view is we should do both," says Allan Meltzer, who advised conservative icon Margaret Thatcher in the 1980s and is now a fellow at the American Enterprise Institute.

First, he says, the government must address the deficit by answering this question: "'How are we going to handle a deficit and debt that everyone recognizes, including the administration, is unsustainable?'"

"Well, let's announce a policy and say not that we're going make draconian cuts in expenditures starting tomorrow, but that we have a plan for bringing this down," Meltzer says.

And there also needs to be stimulus, he says -- but not from spending.

"Cancel the current stimulus program and replace it [with] a program that will work," he says. "And that's a program that cuts corporate taxes."

It 'Has To Be Temporary'

Blinder, who's now a professor at Princeton University, agrees with Meltzer that President Obama needs to outline a more detailed plan to begin bringing down the deficit starting at some future date, probably in 2012.

He does warn, however, that starting serious deficit reduction immediately could send the economy spiraling.

But Blinder disagrees with Meltzer that corporate tax cuts would be a good form of stimulus.

"The evidence on business tax cuts is extremely mixed, so I wouldn't put much store in business tax cuts," he says. "A permanent cut in income taxes, if we could afford [it], would stimulate the economy. But we cannot afford it. Whatever we do has to be temporary."

Blinder also warns that a repeat of President Obama's $787 billion "hodgepodge" stimulus bill is not what's needed. What is needed, he says, is a huge program of tax credits for businesses that create jobs.

"And, or, an overt jobs creation program analogous to the WPA [Works Progress Administration] during the Depression," Blinder says. "What unites those two ideas is that they're very efficient at creating jobs per dollar of deficit."

Blinder also supports the effort to extend expiring unemployment benefits, which has stalled in Congress.

"Extending unemployment benefits is one of the best forms of stimulus we know," he says.

Republicans have blocked the benefit extension in the Senate and argue it will increase the deficit.

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