Against Fiscal Stimulus

As the economy slows many people from Larry Summers to Martin Feldstein are calling for a fiscal stimulus.  I am not convinced.  Spending and tax decisions can
rarely boost an economy.

First, the money for any new spending or tax cuts has got to come from somewhere, right?  Thus there is usually substantial crowding out of any stimulus.

Second, by the time the new spending or tax cut
gets through the political process the economy has moved on and the
stimulus is no longer relevant except by accident.

Third, there just
isn’t that much discretionary spending to play with and even a large
increase in spending, say tens of billions, is too small to make much of
a difference in a 13 trillion dollar economy.

Fourth, in their desperation to "do
something" politicians will often do something foolish.  If a spending
increase or tax cut isn’t worthwhile on its own merits then it’s highly
unlikely to be worthwhile once we add in the benefits of "stimulus."  Thus, it’s one thing to argue for extending unemployment benefits as a matter of welfare it’s quite another to think that an increase in unemployment benefits will so increase spending as to reduce unemployment!  (The implicit view of Larry Summers.)

Economists may call for "temporary," "conditional," and "targeted" stimulus but they won’t be the ones designing the plan.  Spending
increases and tax cuts are policies with long term
consequences that we need to think about carefully. 

Thus, I do not favor a fiscal "stimulus"


Comments for this post are closed