In an essay in Commentary James Pethokoukis seems to endorse New Keynesian economic models

“New Keynesian” models, like one used by the European Central Bank, sought to incorporate [permanent income effects] and predicted that the Obama stimulus would have just a fraction of the impact estimated by Romer and other White House economists. Instead of creating 3 million jobs, perhaps the actual total was 600,000, or about $1 million a job (assuming approximately 80 percent of the stimulus has been distributed.) That would mean the job growth that has occurred has been mostly a result of the natural recovery of the economy.

Such estimates sure seem to better reflect the miserable reality of the past two and a half years than what the White House is selling. The anti-stimulus models also imply that for the Recovery Act to have had the impact Obama sought, it would have needed to be six times larger, or roughly $5 trillion in borrowed money.

So I haven’t cracked open the ECB model and maybe it has one-to-one Ricardian Equivalence with no liquidity constraints at all. That means that households would have simply saved all of the temporary tax cuts and spent none of them.

In an economy in the midst of a credit crisis that seems unlikely, but I want to  focus on another one of James’s points: we would have need “$5 Trillion in borrowed money.”

He says it like it’s a bad thing but my response is: so what?

Either way you slice it we have a good deal. If we had enacted $5 Trillion in tax cuts and every bit of it was saved then the total liability that US households face would not have changed.

They would owe more in future taxes but they would be able to pay down their mortgages and other debts. And, that is a net plus because the rate at which the government borrows is much lower than subprime mortgage rates and indeed currently negative in real terms.

Having the government basically arbitrage the public-private spread is a net win for US households.

On top of that I think it likely that some households who didn’t have crushing debt burdens would have taken advantage of the flood of foreclosed homes, cut rates on hotel rooms and dealer mark downs on new cars to get some really great deals.

That would have been good for those well positioned households and good for the US economy which was facing a flood of foreclosed homes, empty hotel rooms and autos piling up on dealer lots.

It would have been good for those less well positioned households because they could have paid down their debt.

The price would be higher future taxes later but with the government paying such low interest rates the real costs of those future taxes would have been smaller than the taxes that were cut.

Moreover, the United States could have potentially avoided the devastating effects of a long term balance sheet recession.

Now astute readers will note that higher tax rates in the future produce disproportionately higher excess burdens. My simple quip – courtesy of Jim Tobin -  is that it takes a heap of Harberger Triangles to fill an Okun’s gap.

The larger point is that if the taxes were repaid over time, from a larger base and under low and potentially negative interest rates the country could come out ahead in pure dollar terms, not even counting the reduction in suffering that would have occurred from a lighter and shorter recession.