After reading Willem Buiter's long piece (pointer from Mark Thoma), I decided that it is time to come out firmly against a large fiscal stimulus. Instead, I would prefer a small stimulus.
The case for a large stimulus appears to be based on the notion that small stimulus might fail completely, while large stimulus might succeed. This might be true if there are increasing returns to fiscal stimulus or there are threshold effects of fiscal stimulus. I think it is fair to say that the case for increasing returns or threshold effects is not well established either theoretically or empirically.
On the other side of the ledger, the risks of a large stimulus, compared with a small stimulus are:
1. It is harder to spend larger amounts quickly and cost-effectively.
2. There is a greater risk that we will run into a "sudden stop," in which foreign investors are no longer willing to fund our deficits (this is Buiter's main worry).
3. There is a risk that the intergenerational transfer imposed by the stimulus (from our children to ourselves) is excessive, particularly in the context of other intergenerational transfers of the same sort.
4. There is a risk that fiscal stimulus, large or small, is actually ineffective, so that a large stimulus only means a large failure.
5. There is a risk that much of the spending will kick in after a recovery is underway.
6. The government's capacity to deal with an emergency, such as a major natural disaster or a foreign attack, will be limited, because its credit worthiness will be damaged.
7. There is a risk that government will absorb a permanently higher share of GDP. Policymakers will be reluctant to cut public spending for fear of causing a downturn. Moreover, it will be difficult politically to cut public sending.
I suspect that for some of the proponents of fiscal stimulus, the last point is a feature, not a bug. What they really are proposing is a permanent, Galbraithian shift from the private sector to government, in the guise of a large fiscal stimulus.
Overall, on close examination, the case for the large fiscal stimulus, like the case for the Paulson rescue plan, is really quite weak. However, the same elite groupthink that made passage of the Paulson plan inevitable probably also makes the passage of the stimulus package inevitable. Opponents of the stimulus plan will be mocked and vilified in the media, even though they may very well have logic on their side.