The Wonk Room has been arguing recently that an economic stimulus package is a necessary step towards recovering from the current financial crisis. The counter argument – which Matthew Yglesias calls “Neo-Hooverism” – is that the government should exercise fiscal restraint and curb spending, out of concern for widening deficits.
However, during a hearing today before Congress’ Joint Economic Committee, New York University Economics Professor Nouriel Roubini explained that failure to enact a fiscal stimulus could actually result in wider deficits as the economy contracts. In his estimate, this would send the U.S. into a “very severe recession.” Watch it:
Roubini is part of a growing chorus of voices calling for a fiscal stimulus. Yesterday, Gov. David Paterson (D-NY) and Gov. Jon Corzine (D-NJ) joined in, saying that “state governments would face devastating cutbacks if they did not receive assistance soon”:
“We are cutting all we can,” Mr. Paterson told the House Ways and Means Committee. “Therefore, we feel that targeted, sensible actions by the federal government will provide relief for us now.”
CAP’s Michael Ettlinger agrees, noting that “of particular importance are steps to help state governments so that they don’t become a drag on the economy as their revenues dry up and demand on their services grows.”
Today, the economic stimulus package also received an endorsement from Professor Martin Feldstein, an economic adviser to Sen. John McCain (R-AZ). In the Washington Post, Feldstein wrote:
The only way to prevent a deepening recession will be a temporary program of increased government spending. Previous attempts to use government spending to stimulate an economic recovery, particularly spending on infrastructure, have not been successful because of long legislative lags that delayed the spending until a recovery was well underway. But while past recessions lasted an average of only about 12 months, this downturn is likely to last much longer, providing the scope for successful countercyclical spending.
As Matthew Yglesias noted, Feldstein “gingerly avoids pointing out that this is the reverse of what his preferred candidate is proposing.” Indeed, McCain has said that he will freeze government spending on everything besides what he deems to be “vital” programs.
Feldstein believes that government spending is the only way to avoid a deeper recession. Will McCain get the message and endorse a full stimulus package?