Brad, I am more skeptical about the stimulus than you are. Let me explain why.
I don’t doubt that the current stimulus plan will raise GDP figures for the year to follow and also raise employment by some amount. But then we’ll face a choice: either continue spending $800 billion each period to keep these jobs in place, or pull back the $800 billion and have those jobs go away. The first option is bad for long-term growth and very bad for the fiscal position of the U.S. government. Under the second option, it seems like the $800 billion is an expensive price tag for some temporary jobs, not all of which offer high social returns.
I agree that aggregate demand in macroeconomics matters and that fiscal policy can be helpful. I also think it is very hard for fiscal policy to succeed when the banking system is rotten; international dominoes are continuing to fall; and confidence is extremely low. I don’t see the $800 billion snowballing into something very positive for the economy. So I would rather take great care to protect the long-term fiscal position of the U.S. government. I don’t see much of a huge confidence boost following the passage of the stimulus bill. I don’t blame President Obama here. Rather, there’s too much bad news from other quarters. Spending toward recovery is like trying to catch the proverbial “falling knife.”
And how long will it be before taxes have to go up again, therefore leading to tightening in a recession? The Obama stimulus means we are running a big risk of a “double dip” recession.
I think that some of your arguments, in effect, compare the Obama plan to no stimulus at all. But here is my preferred proposal, which I think is both cheaper and more potent.
- Aid to state and local governments is essential, to prevent further catastrophic shocks to aggregate demand. I’ll put that sum at $200 billion or more.
- The worse things get, the more I believe that the tax cuts in the Obama bill are a big mistake, for reasons related to our long-run fiscal position.
- Nor should the “AMT fix” count as stimulus. It should be evaluated on its own terms.
- I agree with Alice Rivlin, OMB director under President Clinton, that the longer-term projects should be put into a separate bill and evaluated on their own merits.
- An even more creative expansionary monetary policy. It boosts aggregate demand but it is cheaper than fiscal policy.
Keep in mind the government gets only so many shots; it needs to save its powder. Remember, the banking plan of Treasury Secretary Timothy Geithner could cost trillions. Should we now be doing an extra $800 billion under conditions that make it unlikely to succeed?
I say no — there’s a better and more moderate path.
Follow Blog War over the federal stimulus package:
- Monday, April 6, Brad DeLong: The Stimulus Package: Like the Housing Bubble, Only Better
- Monday, April 6, Tyler Cowen: Good Policy, Bad Timing: How the Stimulus Package Could be Smarter
- Tuesday, April 7: Tyler Cowen: Stimulus Won’t Help U.S. Industry Restructure Itself
- Tuesday, April 7: Brad DeLong: Arguments Against Fiscal Stimulus Exhibit a “Deep Incoherence”
- Tuesday, April 7: Tyler Cowen: It’s Easier For the Government to Print Money Than to Spend It; Or, Monetarism Rulz!
- Tuesday, April 7: Brad DeLong: Fiscal Stimulus Beats Doing Nothing — By a Lot
- Wednesday, April 8: Brad DeLong: Why the Geithner Plan is Good Medicine for the Banking System
- Wednesday, April 8: Tyler Cowen: The Geithner Plan: An End Run Around Congress
- Thursday, April 9: Tyler Cowen: Coming to Grips With the End of Debt-Fueled Consumption
- Thursday, April 9: Brad DeLong: Yes to Economic Restructuring; No to Universal Bankruptcy
- Friday, April 10: Brad DeLong: Final Thoughts: What Would Turn Me Against Fiscal Stimulus
- Friday, April 10: Tyler Cowen: The Economy is in Too Much Trouble for Stimulus to Help
