Arnold Kling  

The Stimulus Debate, Revisited

Glass-Steagall 2.0?... Business vs. Markets...

Mark Thoma is raising the issue that it is too soon to back away from economic stimulus. See, for example, Paul Krugman, Robert Reich, Tim Duy, and other recent posts. All of these appeared before this morning's employment release, which reinforces the view that the economy remains weak.

You may recall that when this year's stimulus bill was being debated, I pointed out the oddity that one of the arguments for a big stimulus was the fact that there is a consensus that many countries at different times have tried small stimulus, which failed. An interesting question is whether these stimulus efforts were thought to be small at the time, or whether "small stimulus" is what you call a big stimulus after it fails.

Did this year's stimulus fail? I think it is too soon to tell. My biggest complaint about this year's stimulus has always been that while the bill was enacted this year, most of the spending takes place in the out years. If stimulus works, its effects should be cumulative. If it starts slowly, the effects will accumulate slowly.

If we try to address the weak economy of 2009, and the likely weak economy of 2010, by enacting a big spending boost for 2012 and 2013, that would not be good policy. I hope we can all agree on that.

Given how difficult it is for government to spend money both quickly and efficiently, I would hope that those who wish to see more stimulus would at least be open to the idea that Bryan suggested and that I tried to promote, which is eliminating, for some indefinite period, the employer contribution to the payroll tax (explicitly putting more IOU's into the Social Security trust fund, if you are worried about that). We need private sector job creation. Let's have a stimulus that focuses on that goal, rather than on other goals.

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CATEGORIES: Fiscal Policy

COMMENTS (9 to date)
Wil Pollock writes:

Mr. Kling,

I've been following your blog for a short time and I have to thank you for you contribution to the 'debate.' Of course, 'debate' implies two parties exchanging differing ideas. I don't see many opposing views being given much air time. That's another topic.

Your 4th paragraph is identical to what I've been saying to my friends/colleagues since the Stimulus ideas was floated. "You wanna help now -- you gotta do something now." No one really listened then and no one's really listening now.

Time will prove you're correct. When the next Bubble begins, these backended stimuli will just add to the newest layer of froth we've created.

Good work, keep it up!



8 writes:

Why would a one-time boost in spending work any better than a one-time cut in taxes?

winterspeak writes:

ARNOLD: Why not suspend both sides of the payroll tax? Households have too much nominal debt, which is why they are cutting back on spending?

Or do you think they should just go an "recalculate amongst themselves" at 10% unemployment and rising?

Matt C writes:

If we try to address the weak economy of 2009, and the likely weak economy of 2010, by enacting a big spending boost for 2012 and 2013, that would not be good policy. I hope we can all agree on that.

Good luck even making this part of the conversation.

The public discussion (if you want to call it that) about the recession, bailouts, and stimulus is totally disheartening. I'd like to be upbeat about the future of the U.S., but the most optimistic point of view I can must is that there is a lot of ruin in a country. I'd like to hear someone (maybe Bryan?) explain why this enormous lurch toward statism really isn't that bad.

geno writes:

It's a bit difficult to recalculate when small biz does not have the credit lines to get things done:

"Small business loans are hard to find, and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year."

Looks like we are trying to help everybody except for the folks that actually create jobs.

Larry writes:

Better to have a temporary cut (say 12 months) in sales/excise taxes, with the Feds making up the difference. That stimulates demand immediately, benefits literally everyone, doesn't impeded the movement of resources to their new homes, and doesn't allow Congress to play favorites.

Per Kurowski writes:

The difference in bank capital requirement between an unrated client and an AAA is 6.4 percent, which at a capital cost of 15 percent, results in 1 percent a year. And so, in “the land of the brave”, there is a 1 percent tax on perceived default risk! Do the regulatory wimps really believe that creating jobs and moving the world forward is a risk free affair?

Joe B. writes:

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Wilmot writes:

Call me cynical, but I think the Obama administration may have calculated time into their stimulus suggestion after all. A big boost in the economy at 2012 would certainly help Obama win in re-election, or at least one would think.

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