The Austerity Files

You'll see so many blog posts and columns talking about the low interest rates and high unemployment of our times, thus arguing in favor of further fiscal stimulus.

So far, these are the least likely arguments you will hear addressed:

1. The monetary authority moves last anyway.

2. We don't need exotic "quantitative easing," we can simply print up more money and hand it out to consumers through a simple vouchers program, at basically zero budgetary cost.  If consumers save all that money, fiscal stimulus also won't have much of a kick.

3. The real fiscal problem is spending contraction at the state level (expanding and contracting spending are not symmetric in their effects; contracting spend hurts more than expanding spending helps).  The correct fiscal policy move would have been, and still is, to take Medicaid away from the states and make it fully federal.  This would give state budgets a huge break, and help employment, yet as a one-time change it reduces the moral hazard problems from ongoing outright grants.  Furthermore federalizing Medicaid is a good idea in its own right and it also could be a spur to make other improvements in the program.

4. Rather than just arguing about the most likely scenario, we should apply the same worst case scenario thinking that is recommended for climate change.

5. Macroeconomics really is just a theory.  Politicians are reluctant to spend more money, in tough times, on the basis of a mere theory.  Advocates of fiscal stimulus make it sound as simple as solving an undergraduate homework problem and I think they sometimes genuinely do not realize how much the rest of the world, including politicians, views them as simply being very convinced by their own theory.  There are plenty of historical examples with confounding factors and I've linked to some of them lately.  One default hypothesis is that the ranges of fiscal policy being discussed, whether looser or tighter, aren't going to matter much one way or the other.  

The next time you read a blog post or column on fiscal stimulus, and it isn't addressing those issues, the correct response is to think that a deeper analysis is needed.  Don't be swayed by the mere repetition of the usual arguments about interest rates, unemployment rates, and the like.


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