Stimulus Followup

by Ryan Avent

A few other thoughts on the topic while I’m at it. Tyler Cowen writes of stimulus that some economists may find themselves in the “do or do not,” camp on the subject — that you either worry about debt or about flagging output, but not both. I’m not sure I agree with that (I think the costs to total inaction are likely to be enormous), but there is a real risk to doing too little right now. If the Congress manages to pass a package of $500 billion or so right now, then the economy will perform better than it would in the absence of any stimulus. But the difference will be small — perhaps less than a percentage point in unemployment. More will be needed, but the package will not be judged as a success, so more will be more difficult to come by. Paradoxically, a larger stimulus package now may make it easier to pass a booster shot later, should we need one.

Meanwhile, Megan mentions a criticism of stimulus that has appeared in a number of places — that it will make subsequent reforms more difficult:

The stimulus package as written by the House did let them advance some priorities, like health insurance, but was so expensive that it was going to make it much harder for the Democrats to pursue broader reforms.

As such, she says Democrats might be better off with a smaller stimulus bill. I disagree with that for several reasons. First, Democrats will need to be popular (and, post-2010, in office) to carry out their agenda. If the economy does not recover strongly, they’ll lose their mandate and possibly their majorities. Secondly, a strong recovery will do wonders for the budget outlook. And finally, I don’t think anyone really thought the Democrats were going to move forward on long-term health care reforms or infrastructure investments (or other spending priorities) without specifying a means to pay for the changes. Obama seems quite serious about paying for his legislation, even offering to return to pay-as-you-go immediately after the stimulus bill, so I don’t think that “think of the deficit!” will work as a rallying cry for the opposition.

Basically, it’s difficult to see how Democrats come out ahead should an inadequate stimulus (or, god forbid, no stimulus at all) be the outcome here.