The argument for fiscal stimulus is simply that it will stop things from getting worse by preventing further collapses in aggregate demand. That may be true but fiscal stimulus won’t drive recovery. Recovery requires that zombie banks behave like real banks, that risk premia are properly priced, and that the economy undergoes its sectoral shifts toward whatever will replace construction and finance and debt-driven consumption. Fiscal policy won’t do much toward these ends and in fact a temporarily successful stimulus might hinder these long-run adjustments.
Here is a very good piece from Hal Varian on fiscal stimulus.
Tyler,
Have look at http://www.levy.org/pubs/sa_dec_08.pdf . This is from Wynne Godley’s Keynesian stable; the people who have had the most reliable medium term model of the US economy fro about the last 10 years. (Yes, they foresaw the crisis.)
They think a massive fiscal stimulus is necessary, but there is no way that a unilateral US stimulus can do enough.
If stimulus is just life support, doesn’t that make it another bubble, call it an “infrastructure bubble”, albeit it without rising prices.
Other than the palliative effects of more people working and income support for the unemployed, isn’t stimulus just buying time for banks, investors, firms and workers to shift their focus from the old dead sectors to whatever is to come?
“I predict future happiness for Americans if they
can prevent the government from wasting the labors of the
people under the pretense of taking care of them.”
Thomas Jefferson
There is even a T-shirt!
One can agree entirely with Hal Varian’s essay (and I think I do), but he leaves us hanging. Businesses are reluctant to invest. But we need to encourage investment. So how do we do that? Tricks like investment tax credits, which lower the (apparent) marginal cost of capital are less likely to be useful when businesses fear, with good reason, that they will have difficulty selling the products that the increased investment spending would allow them to produce.
The problem is to induce businesses to believe that consumption spending (or exports, or government purchases) will be enough higher in the future, when the increased productivity of increased current investment spending comes on line, to justify the increased current investment spending. Varian does no explain how we can accomplish that, and this alone makes a focus on increasing current investment spending something of a shot in the dark.
I’ve gotten fed up enough with the media claims that professional economists support stimulus to start a web list of skeptics at
http://rasmusen1.blogspot.com/2009/01/economists-opposing-massive-fiscal.html
If you know of names I should add (with links) please let me know.
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