Arnold Kling  

Stimulus: The Mainstream View

Race and Institutions... Questions for Goolsbee and Sam...

Peter Orszag does his job, offering the mainstream view on economic stimulus.

When the constraint on short-term growth is aggregate demand, as appears to be the case today, both monetary and fiscal policy can help by boosting spending.

i. On the fiscal policy side, the automatic stabilizers built into the budget will help to attenuate any economic downturn by providing a cushion to after-tax income.

ii. The question is whether additional fiscal action would be beneficial as a complement to monetary policy actions and the automatic stabilizers built into the budget. One way to think about it is that fiscal stimulus can help provide insurance against the risk and severity of a possible recession.

iii. Our estimates suggest that stimulus of between ½ and 1 percent of GDP or so would reduce the elevated risk of recession to more normal levels, as long as the stimulus is well-designed.

My view is less favorable toward the idea. First, this is an election year, which means that politicians are biased toward deficit spending. Second, my guess is that so far we have seen less destruction of paper wealth than we did in the 2000 stock market meltdown. Third, I am not sure how much I believe in the mainstream view of macro.

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CATEGORIES: Macroeconomics

COMMENTS (5 to date)
Arnold Kriegbaum writes:

I've been eager to see your view on "stimulus".
1. My favorite line of dialog this morning (22nd of Jan.) was that WAll ST. is looking for more stimulus than is currently being discussed.

2. I remember reading in some "dismal" writing that in contrast to what Arnold states above, wealth can't be destroyed, only transfered. I have pondered that, since it sure looks like wealth is destroyed at times and no other entity appears to pick up the gain.


Ajay writes:

I think Arnold would agree that wealth can only be transfered, not destroyed (except of course in exceptional and fundamentally different circumstances, like when the morons in the Roosevelt administration mandated destruction of livestock in order to keep prices stable). When Arnold says that paper wealth was destroyed, all he's saying is that people would no longer trade for that stock in the expectation that it is worthwhile. The real money that some hypothetical stock buyer would have traded for stock still sits in their hands, just as the money that somebody spent buying the stock before the bust sits in the financiers and executives' hands. No money or goods are destroyed in the process. :) All that has been destroyed are the expectations that the dot.coms would make money in the foreseeable future. It's like a casino: some people bet, other people collect on the bets, and in the long-run the casino always wins but add up all the money and it's zero-sum.

Gary Rogers writes:

What gets me is that all solutions to economic problems appear to be the same. Reduce interest rates and encourage consumer spending. In reality, all economic disruptions are not the same. We certainly have financial problems right now, but someone pointed out this morning that the Fed is not maintaining a tight monetary policy, manufacturers have low inventories and unemployment is relatively low. With this combination, can we say we are in a classic recession? What we have may be more like the 1987 recession that never happened.

What we do have are consumers who have reached the limit of their ability to spend and financial institutions who did not recognize until too late that they had not accounted for the risks that suddenly appeared when the situation changed. Does it make sense, or is it even moral, to try to solve this problem with more consumer spending? Will masking the symptoms by freezing foreclosures help anything? Where are the people who understand what is going on?

Natt writes:

With the federal government consuming 22% of the economy in direct outlays, as opposed to the 18% that seemed to perform better 10 years ago; the economy has been a bit over stimulated for 8 years.

The prime lending problem, in real losses, is only the inefficient use of about 1 million new homes, hardly a blip.

The way out, traditionally under the conservatives, is to import mass labor to compensate for expanded government, and we will likely do the same.

Mike writes:

What we have is a case of rent seeking on the part of the political elite. The whole mess boils down to "don't just stand there, do something."

If the problem is to stimulate the economy - a questionable proposition - then they believe we need to inject helicoptered $100 bills targeted at those with the highest marginal propensity to consume.

Milton Friedman argued that consumption is a function of permanent income. Perhaps our "Political elite" goal is to make this helicopter strategy permanent.

From another perspective, if the problem is getting stimulation to the sector that is causing the problem, how is $800 or $1,600 going to help pay a mortgage payment in California on a $500,000 loan. That's less than one month's house payment.

If the money is helicoptered into high marginal propensity to consume consumers, i.e., low income, they are most likely to spend it on basic consumables. Not my idea of the sector that needs stimulation.

On the other hand, I saw where analysis of credit card usage following the 2001 exercise in fiscal stimulation indicated the biggest bang for the buck was with people who had the highest credit card balances. You would have thought they would have paid down their credit card balance but instead - zombie like - they went out and spent it. BTW, the 2001 fiscal stimulation was only $300. I guess we have inflation in the market for rent seeking.

So the solution is to target the money - if we can - to those who are least responsible in managing their financial affairs. Has it all come to that??

I for one am going to pay down my home loan balance and consider it to be a refund of taxes I should have never paid!

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