Slash expenditure to balance the budget

The implication is that the U.S. may not face a tradeoff between shrinking the deficit and fighting the recession: it can do both by cutting wasteful spending (Medicare, Social Security, and the wars in Iraq and Afghanistan, for starters) and by cutting taxes.

The reduced spending will make the economy more productive by scaling government back to appropriate levels. Lower tax rates will stimulate in the short run by improving consumer and firm liquidity, and they will enhance economic growth in the long run by improving the incentives to work, save, and invest.

Deficits will therefore shrink and the economy will boom. The rest of the world will gladly hold our debt. The U.S. will re-emerge as a beacon of small government and robust capitalism, so foreign investment (and talented people, if immigration policy allows) will come flooding in.

A happy ending all around.

Jeffrey A. Miron is a senior lecturer and director of undergraduate studies at Harvard University and a senior fellow at the Cato Institute. He blogs at http://jeffreymiron.blogspot.com and is the author of the “Libertarianism, from A to Z,” forthcoming from Basic Books.