Economists Sound Off On Fiscal Stimulus

I’m suffering from a miserable cold, so posting will be light this evening which ticks me off as there is a lot I want to write about. So, taking the easy way out, here are a couple of things pulled off the WSJ Real Time Economics site.

  • What would the economy look like without fiscal stimulus? … The lack of stimulus means that the collapse in private spending drives the economy down much further. Without the stimulus, GDP growth stays negative for all four quarters of 2008 , and the year averages minus 3.6% growth, instead of minus 2.5%. And the recovery in 2010 is far more anemic, with growth of just 0.7%, instead of 2.2% in [IHS Global Insight’s] baseline [forecast]. Without the stimulus, the unemployment rate rises to 10.2% in mid-2010, a full percentage point above the baseline. The loss of jobs is both deeper and more prolonged. Without stimulus, the cumulative loss in jobs peaks at 6.9 million in the second quarter of 2010, rather than at 5.0 million in the fourth quarter of 2009. –Nigel Gault, IHS Global Insight
  • We simply don’t know how well the proposed stimulus will work — if at all (is aggregate demand always the relevant war?). It’s a kind of Hail Mary pass, an enduring belief in aggregate demand macroeconomics at the theoretical level, even in light of broken banks, sectoral shifts, and nasty, failing expectations, all mixed in with hard to spend well, slow to come on line, monies. Yes it could work but our agnosticism should be strong rather than just perfunctory. Tyler Cowen, George Mason University
  • This fiscal boost plan is too small, but I do want to admit that doing this well is harder than it looks. The tax-cut part does not look terribly effective as a stimulus — it is a step toward compensating for higher income inequality and a political play to make it more likely that Republicans will lose politically by trying to block the package rather than a significant boost to employment. Thus I do not think you would want to make the tax-cut part larger. And it is hard to find a lot of additional spending projects that can be ramped up quickly and do a lot of good — relatively soon in that endeavor the short-term fiscal multiplier falls below one. They are trying their best. J. Bradford DeLong, University of California, Berkley
  • And finally this which belies the argument that no economist of note is opposed to the plan.

  • Notwithstanding reportsthat all economists are now Keynesians and that we all support a big increase in the burden of government, we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth. Statement signed by more than 200 academic economists
  • So there you have it. I didn’t publish all of the remarks in the interest of keeping this to a reasonable length. The link to the Journal post is below (note it’s the WSJ so you need to have a subscription). Needless to say, there is no unanimity which frankly confirms what I have been saying for the past month. This is an experiment and we are flying by the seat of our pants.

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