Economics: Stimulus, Without More Debt

... 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.

The reasoning is very simple: On average, people's pretax incomes rise because of the business directly generated by the new government expenditures. If the income increase is equal to the tax increase, people have the same disposable income before and after. So there is no reason for people, taken as a group, to change their economic behavior. But the national income has increased by the amount of government expenditure, and job opportunities have increased in proportion.

For more, see Stimulus, Without More Debt by Robert J. Shiller, December 25, 2010 at The New York Times.