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.


jt

Or people just realize that Keynesian economics is wrong.

Witty Nickname

" 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?

peter

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

M.B.

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.

Ike

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.

Proudhon

"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

JK

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.

Scott W

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.

Mark Wolfinger

What I don't understand is how can we alk about a second stimulus when the vast majority of the money for the first stimulus has not been spent?

Bo

My opposition comes from the fact that:
* We spent an unprecedented amount of money on "stimulus" in absence of solid evidence that spending huge amounts of money actually stimulates the economy (to be sure, there is theoretical support for the idea, but even proponents conceded that there aren't many, if any, good examples of it ever being done properly and working)
* We should wait to get empirical verification that "stimulus" even works (and settle the question once and for all) before spending another vast sum of money

If stimulus supporters are right, then let's listen to them. If they're wrong, then let's quit spending the next generation of taxpayers' money.

Ryan

"I can understand that there are folks who are always against fiscal stimulus."

What the proper response will be depends on the nature of the problem. It doesn't make sense to be "always against fiscal stimulus." Neither does it make sense to be "always for fiscal stimulus." I find it hard to believe that people put so much effort into defending one or the other without addressing the causes of our problem.

I am against the stimulus. However, if our problem was caused by underspending, I would be for the stimulus. But I think it's clear our problem was caused by overspending. That's why I'm against the stimulus. You can't fix an overspending problem with more overspending.

Dr. Tonic

Who says we need a stimulus anyway? We were living beyond our means with borrowed money that wasn't earned; why should we stimulate our current economy to try to get back there? wtf?

The stimulus is keeping afloat many of the things that were wrong in the first place.

It's like we are all on the Titanic and you think we should use the wood from the emergency boats to patch the holes.

Admit it, that ship is done. Those days are done. The only thing a stimulus can do is let us enjoy the lavish boat a little longer, only to eventually realize we no longer have a way to start with a solid base.

Kevin

The real question is whether a stimulus as ill-concieved as the last one will acutall be better than the alternative.

While there is no denying that fiscal stimulus can be productive during a recession, it is pretty clear at this point that the previous stimulus was less of a stimulus than an excuse to permanently expand several key government programs.

What percent of the stimulus has been spent to this point? How is that a stimulus?

doug

Where exactly does the money come from? Hot off the printing press or a tax increase on production?

Either choice is wrong. Stop the printing press and give relief to taxpayers. Yup that's correct, you have to reduce entitlements to balance the equation.

frankenduf

you forgot to mention there was the Great Depression-
people who 'argue' against fiscal stimulus are analagous to the people who argued against saving banks and the people that argue for laissez faire policy- these people either didn't live through the Great Depression or apparantly are flippant about its consequences if it were to recur

Harlan

Just write large checks to the states, and write them now. They'll spend the money on not cutting the jobs of teachers and police officers, which will have an immediate impact (or, rather, will stop the immediate impact of having a hammer dropped on your skull). The rest of the stimulus is of minor import compared to that!

WholeMealOfFood

The word "stimulus" is compelling because it reminds of the hard sciences such as physics and chemistry. There, cause and effect can be precisely teased out through repeated, controled experiments. The word is incorrectly applied to macroeconomics. There is no laboratory, not enough historical data, and there are too many variables to be precise in predictions of the effects of a "stimulus". Japan tried for many years the types of programs that are being recommended, with little effect except a daunting pile of national debt.

Allen Reynolds

There's not a rat hole in the universe big enough to hold the last stimulus, which is why all the money hasn't been spent yet.

Having spent our children's and grandchildren's future, must we also spend our great-grandchildren's?

Conor - ireland

I am all-for government spending as a last-resort stimulus to any ailing economy, but from my understanding of the last stimulus and from my studies of the US government and its organisation, this is a bad idea for the US.

Money being pumped into the economy to postpone manufacturing job losses is not money being spent wisely. The US government cannot allow itself to support jobs that are not sustainable in the real world. The fact of the matter is that producing cars and other manufactured goods can be done better and cheaper elsewhere The UK and Ireland have learned this lesson and spent their money trying to re-train people to do something that is sustainable for the future. This is what the US economy needs, not subsidising big businesses such as GM which are going to have to go away eventually regardless of what is done now.

The US economy needs a boost in human capital to ensure that high skilled jobs in future-proof industries are added, and the money spent on saving GM would have been better spent by sending GM employees to college.

Read more...

Kevin H

I think #4 illustrates a big difference between academia and making policy. In academia we are taught to think of a single variable at a time. Is A better than B, but here we have unavoidable non-linearity. Government spending tends to beget more government spending, so spending more in bust years unfortunately naturally leads to more spending in boom years. So, unless we can craft the stimulus in such a way as to prevent spending in boom years, I'm afraid you are going to loose out on that last point.