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.