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Question for Stimuskeptics

By Matthew Yglesias  

"Question for Stimuskeptics"

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Megan McArdle’s dubious about the prospects for an economic stimulus given the background conditions shown in this chart:

debttogdp_1.png

And I’ll have to concede that that is an awful lot of debt. She also says that while stimulus “can ease the pain of a slowdown (at least in theory), as Tyler Cowen has been pointing out, the actual empirical evidence that massive government spending can shock an economy the size of ours into a permanently higher level of output is . . . well, it’s sort of hard to find a wittily apt description of something that doesn’t really exist.”

From where I sit, demands for evidence need to be put into perspective. There simply aren’t very many similar cases to analyze. The Keynesian reading of the empirical record of the Great Depression is that fiscal stimulus was working during FDR’s first term and that the recession-within-a-depression of his second term was caused by FDR’s decision to abandon stimulus in favor of an attempted return to balanced budgets. One would further note that the defense buildup associated with World War II led to economic recovery though wartime necessity eventually prompted government expenditures to suffer from diminishing returns and become macroeconomically counterproductive (it was a big war). That’s not the best empirical evidence in the world. What you would want would be a clear-cut case where we had a depression, then had a sustained stimulus, and then the depression ended. That’s not what we have. But it’s not as if there are tons and tons of examples of the industrialized American economy entering a depression to examine. There’s just the one case, complete with the policy choices that were actually made and the cataclysmic war that actually happened. Consequently, the empirical evidence supporting any prescription is necessarily going to be a bit thin.

So to pull a bit of the old burden-shifting, what’s the stimulus-skeptics’ alternative prescription? At this point in time just about everyone—liberal or conservative—agrees that it’s generally preferable to eschew fiscal stimulus and let monetary policy do the heavy lifting. The pro-stimulus analysis begins not with the idea that fiscal stimulus is awesome, but with the observation that we’ve already done a great deal of rate-cutting, can’t cut rates any deeper, and all signs are of the situation getting worse. Is the anti-stimulus idea to do nothing and hope for the best? To beg for the world’s surplus countries (Germany, Japan, China, oil producers, Switzerland, etc.) to do giant stimulus while we sit around? Are there “unconventional” monetary policy tricks Bernanke needs to be trying? I don’t mean those as rhetorical questions. But we do face an actual situation that’s rather urgent and calls for decisions to be made. The Republican Study Committee’s alternative to the stimulus plan is permanent income tax cuts, which isn’t a serious answer to the question. What do the smarter stimulus skeptics of the blogosphere advise as an alternative?

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