The Too-Small Stimulus

At the time it was proposed, many liberals thought the stimulus plan was too small. Or to be more precise, I think what we thought was that it was imprudently small. A fiscal expansion that turned out to be “too big” would waste some money and require the Fed to counteract the error with higher interest rates. Not great, but not so terrible either. By contrast, a too-small stimulus while we’re already up against the zero-bound on interest rates could cause significant problems if the underlying economic situation turns out to be worse than anticipated. And as Neil Irwin and Annys Shin write in The Washington Post that’s exactly what seems to be happening as job loss numbers come in at a frightening pace.

Similarly, Martin Feldstein makes the case that we need another stimulus package. Meanwhile, though, House Republicans aren’t listening to conservative economists like Feldstein, they’re reading Atlas Shrugged and talking about a spending freeze.