Words I wrote yesterday about fiscal policy

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.


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