What instead?

Matt Yglesias asks a very good question:

So to pull a bit of the old burden-shifting, what’s the
stimulus-skeptics’ alternative prescription? At this point in time just
about everyone–liberal or conservative–agrees that it’s generally
preferable to eschew fiscal stimulus and let monetary policy do the
heavy lifting. The pro-stimulus analysis begins not with the idea that
fiscal stimulus is awesome, but with the observation that we’ve already
done a great deal of rate-cutting, can’t cut rates any deeper, and all
signs are of the situation getting worse. Is the anti-stimulus idea to
do nothing and hope for the best? To beg for the world’s surplus
countries (Germany, Japan, China, oil producers, Switzerland, etc.) to
do giant stimulus while we sit around? Are there “unconventional”
monetary policy tricks Bernanke needs to be trying?

Pulling together some previous posts, I recommend:

1. A certain amount of "defensive" fiscal policy aimed at keeping state and local government budgets roughly constant.  This will limit downside but it won't much "stimulate," for reasons which should be apparent in the graph shown by Matt.  In various emergencies it is inefficient that state and local governments are not allowed to run deficits but implicitly the Feds can do it for them.

2. Unorthodox monetary policy, as advocated by Robert Lucas and also, earlier, Keynes.  You can stimulate AD at much lower cost this way.  "Cutting short rates" is by no means synonymous with "monetary policy."

3. Bank recapitalization.  This will cost lots and we should reallocate money away from "stimulus" toward this problem.  Falling aggregate demand is a derivative problem in today's crisis but this is a fundamental problem.  There is a vague sense on the Democratic side that "we can do everything" but the reality is that of the budget constraint, not "guns and butter together."  Have you noticed that Obama is not presenting a consolidated recapitalization/stimulus bill?  That is no accident.

I should add that I am skeptical of tax cuts as a form of stimulus, so we should evaluate tax reforms on their own merits, which involves broader questions about the overall path of spending and taxes.  But if you wish to go this route, cutting the payroll tax is probably the most promising idea.


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