Consider an economy called Käseland, with gross output equal to approximately $475 billion, and unemployment rate of 7.5%, so considerable underemployment of factors of production exists; consistent with this interpretation, the general nonfarm wage rate has been relatively constant, growing at only 1.2% on a 12 month basis through 2010, and the price level has risen by about 1.5% from the second half of 2009 to second half of 2010.

Suppose there is a budget deficit, that you wish to close. How do you maximize the negative impact on output?

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(That’s not my phrase, it’s Rep. Boehner’s). Or, tax cut extension for income less than $250,000 passes. From The Hill:

House passes middle-class tax bill with three Republicans supporting

By Vicki Needham – 12/02/10 04:00 PM ET

The House passed by a vote of 234-188 a measure that permanently extends expiring middle-class tax cuts and provides a patch for the alternative minimum tax.

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Four Acronyms in a Very Depressing Play

Truly we are in a strange world where legislative extension of unemployment insurance payments, which is highly effective at maintaining aggregate demand, is stalled, while giving tax cuts to households with income in excess of $250K (a.k.a. the Todd Henderson households) moves forward despite having very little impact on employment and aggregate demand. In other words, on benefit-cost grounds we would want to do exactly the reverse. Given the sheer incoherence of some of the arguments being propounded, it might be useful to recap some findings.

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The New York Times has provided a neat interactive graphic that allows one to see how various proposals affect the budget deficit in 2015 and 2030, here.

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If (1) one is a concerned about budget deficits over the longer term, but (2) is concerned that a reversion to pre-2001 tax rates would hurt short term growth, then one should favor the partial extension of EGTTRA/JGTRRA for only those earning less the $250K ($200K for singles).

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…According to the CBO

In evaluating the advisability of extending either completely or partially the tax cuts of 2001 and 2003 (aka EGTRRA and JGTRRA), and implementing additional fixes to the AMT, one should consider the impact on the budget.

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Is There Enough Money in the World — and At What Cost?

From the abstract of a paper coauthored with John Kitchen:

This paper examines the potential role for foreign official holdings of U.S. Treasury securities and the associated implications for Treasury security interest rates, international portfolio allocations, net international income flows, and the U.S. net international debt position, using a baseline outlook of current and projected U.S. budget deficits and growing debt. …

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