The Case for More Fiscal Stimulus

I’ve been struck recently that as I talk to most economists, they think that the case for a further fiscal stimulus is pretty solid. At least that’s what I hear in the hallways and seminar rooms. But that’s not what I hear in the media; for some reason the most outspoken economists are the anti-stimulus folks. And so I did a short piece for Public Radio’s Marketplace last Thursday on the need for more fiscal stimulus.

I thought it worth taking a closer look at the main arguments against the stimulus:

1. We should let the current stimulus run its course.

Surely any sensible approach to fiscal policy says that a bigger downturn demands a bigger response. Back in January, it looked like economic conditions would be pretty bad. That was too optimistic. Today, we know that things are really bad. If a pretty bad economy called for a pretty big stimulus, then a really bad economy calls for a really big stimulus. I can understand that there are folks who are always against fiscal stimulus. But I don’t understand how one could have thought the first stimulus was needed, and further stimulus is not.

2. Some forecasters argue that we are close to a turning point.

I’m not so sure. But even so, the sunniest projections out there still say that G.D.P. will be below potential for at least another three years. And unemployment is unlikely to be below 7 percent for quite a while. Fiscal policy can help speed up the process of getting people back to work.

3. Some argue that the original stimulus didn’t work, and so we shouldn’t try more.

This is silly for a variety of reasons. First, it is way too early to tell. Second, the economy may be bad, but to figure out whether the stimulus helped or hurt, you need to know the counterfactual: how would the economy have performed otherwise? And third, there’s just not that much new information in a couple of months data to lead any sensible economist to a major revision in his views about the effectiveness of fiscal policy. One hopes the accumulation of evidence across decades and countries trumps a high-frequency reading of the tea leaves.

4. There’s the deficit.

This one is a question of design, not of logic. A good fiscal stimulus is about spending more when the economy is in trouble and less when it is booming. The real problem in recent years has been a tendency to overspend during a boom, not during recessions.

The case for more stimulus is pretty simple: the economy is doing badly, and fiscal stimulus can help. And the risks are asymmetric. Doing too little risks both deflation and the possibility of doing lasting damage to the economy. Doing too much is both unlikely and unlikely to have as unduly severe consequences.

You can listen to my full commentary here, or read more here.

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  1. jt says:

    Or people just realize that Keynesian economics is wrong.

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  2. Witty Nickname says:

    ” Some argue that the original stimulus didn’t work, and so we shouldn’t try more.

    This is silly for a variety of reasons. First, it is way too early to tell.”

    This comment is silly for a variety of reasons. If it is too early to tell that the stimulus is not working, would it not be too early to tell if it is working?

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  3. peter says:

    Maybe the solution is not another, bigger, stimulus bill, but ensuring that the last, big, stimulus bill’s money is finally disbursed. Last time I checked, we haven’t even given the first bill a fair shot of succeeding yet

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  4. M.B. says:

    Point 4 says it all:
    “The real problem in recent years has been a tendency to overspend during a boom, not during recessions.”

    So without restraint during boom years, there is no money saved for recessions. But we spend any way.

    Also “stimulus” spending is more pork than stimulus. From my inside view, governments are currently falling over themselves creating worthless projects to spend down the “stimulus” money.

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  5. Ike says:

    Justin –

    Not only does “it’s too early to tell” cut both ways, but most of the stimulus that had been authorized has not been spent. And your “lack of a counterfactual” can be absurdly applied in the reverse as well.

    Now, if your argument is that the amount that has been spent on economic stimulus should have been higher, that might hold water — but the vast unspent allocations should not be included in determining the next level of StimuFunding.

    If we spent 200-billion out of 800-billion, we don’t have to go back and get another 800-billion just to spend another 200-billion.

    Frankly, the public outrage is over how MUCH of the “stimulus authority” went to pet projects and partisan wish-lists, instead of the sorts of things we were urged were SO necessary-right-this-instant-NOW.

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  6. Proudhon says:

    “We threw tons of money at this problem, and it hasn’t gotten any better … it may get better though, its too early to tell. In light of the fact that it might yet work (although certainly hasn’t thus far) let’s spend BILLIONS more dollars that we don’t have on something that may work, but hasn’t shown any signs of working yet”

    pretty much nail the logic? … great, because its terrible logic and doesn’t make any sense

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  7. JK says:

    Firstly, this article ignores the fact that some people aren’t concerned with the stimulus “working” or “not-working” but rather that it should never have been done in the first place. Or, if it HAD to be done, to not be filled with billions of pork-barrel spending that will have little to NO effect on “stimulating” the economy, but rather will stimulate the politicians re-election chances.

    Secondly, the statement “A good fiscal stimulus is about spending more when the economy is in trouble and less when it is booming” is completely unfounded. When you are strapped for cash that is a time to SAVE money, not to spend more. This country (and its government) could stand to spend a little more responsibly.

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  8. Scott W says:

    Call me stupid and common, but I think many people don’t like the idea that fiscal responsibility doesn’t mean the same thing to large governments as it does to its people.

    I’m one of the idiots who thinks that *maybe* a retraction of a fake and overstretched economy would be a good thing. I was laid off in April and am of course scrambling constantly now to support my family, but even that doesn’t change my mind that the financial and real estate sectors were morbidly obese and needed a diet.

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