The present scenario analysis highlights two black swans. The first one is Depression Averted, under which a stimulus keeps the economy from falling in a downward spiral of layoffs and shutdowns. The other black swan is Catastrophic Collapse, in which a loss of confidence by investors in U.S. government debt leads to a total collapse in the U.S. financial system, with economic activity contracting by 90 percent or more.
The case for or against a fiscal stimulus comes down to the relative importance of these two black swans. A stimulus is worthwhile if the probability of Depression Averted is very high compared to the probability of Catastrophic Collapse. Although neither scenario is likely, I believe that Catastrophic Collapse represents the greater risk.
Read the whole thing. My point is not that I think that a sovereign debt crisis is likely if the U.S. enacts the stimulus. But I think it represents a much worse possible outcome.
The sensible policy would be to enact a small but genuine stimulus. The current stimulus bill is both too small (in terms of the actual stimulus) and too large (in what it does to the U.S. fiscal position). Greg Mankiw's idea of cutting payroll taxes while scheduling future increases in the gasoline tax would be better.