A Vision of the Future

From Ray Fair:

The stimulus has a big effect in 2010, but by 2012 the economy is roughly back to baseline (except for variables like the federal government debt). In the baseline case the federal debt rises from $5.78 trillion at the end of 2008 to $8.74 trillion at the end of 2012. In the stimulus case the debt at the end of 2012 is $9.34 trillion, about $600 billion more than in the baseline case. This does not take account of possible increases in the federal debt from the bailout activity.

So there is short run gain from the stimulus bill, mostly in 2010, but the potential long run costs do not seem trivial. If the stimulus bill is passed and the bailout continues, it may be that large tax increases will be needed starting in late 2011 or 2012.

I don’t have a lot of confidence in Fair-style macro models, but it’s also a lot better than just guessing. Suppose he’s right. Will Obama and Congressional Democrats be willing to impose a big tax increase before the 2012 elections?

[Via Mankiw]

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