Should U.S. Fiscal Policy Address Slow Growth or the Debt?

The United States faces two economic challenges: slow growth and an ever-increasing ratio of debt to GDP. Many policymakers believe they face a dilemma because the policy solutions to the two problems are opposite. To address the slow recovery, standard—Keynesian—economics suggests further fiscal stimulus in the form of lower taxes or higher spending. But that recommendation runs head-first into the economy’s second crucial challenge, the long-run fiscal imbalance.
Yet policymakers are wrong to see this as a dilemma. The Keynesian model does not evaluate government expenditure using the standard microeconomic concepts of economic efficiency (cost-benefit analysis); rather, it assumes that all expenditure is beneficial. Some government purchases, however, are not a productive use of resources, and transfer payments distort economic incentives and thus can reduce economic output. In contrast, broad-based tax cuts, especially those that lower marginal tax rates, enhance economic growth.

Read more: http://www.cato.org/publications/policy-analysis/should-us-fiscal-policy-address-slow-growth-or-debt-nondilemma