Debating Stimulus


Brad DeLong and Tyler Cowen debate fiscal stimulus. Brad characterizes the disagreement:

Tyler worries that the U.S. economy faces deep problems of structural adjustment. I think that deep problems of structural adjustment melt away to normal annoyances whenever aggregate demand is high–that they appear to be insurmountable and painful difficulties only when aggregate demand is low.

I think that when considering these issues it’s perhaps useful to think back to 2006 and 2007. I don’t recall that many market-oriented economists were saying back then that there were huge underlying structural problems with the United States economy. I recall some people saying that, mostly on the left, mostly being dismissed as unduly pessimistic and/or motivated by partisanship, and generally now supportive of fiscal stimulus.

It always strikes me that the published versions of these debates seem a bit too fastidious. As best I can tell, the real dynamic of the debates here are that many people on the left hope and many people on the right fear that the coincidence of a major economic meltdown occurring shortly before an election in which progressive candidates did very well can lead to a lasting change in the policy environment. After all, when you engage in some temporary deficit spending the deficit could be temporary in two ways. The spending could vanish. Or taxes could be raised. Progressives hope, and conservatives fear, that much of the new deficit spending will prove popular and anchor expectations about levels of federal services.

This hope/fear is extremely realistic. It seems very unlikely to me that all of the American Recovery and Reinvestment Act’s spending increases will actually be undone when the legislation expires.

That gives people who think that overall levels of taxes and spending should be lower strong reason to cast around for reasons why stimulus is a bad idea. Were conservatives in power and proposing stimulus via a temporary tax cut, I believe most of the people currently making fallacious arguments about Ricardian Equivalence wouldn’t be doing so. They’d be saying to themselves “even if this doesn’t work, it’ll probably lead to lower tax rates over the long term so whatever.” Nobody likes to believe that they’re just screwed, that the short-term economic situation dictates letting the political opposition unleash some of its long-treasured schemes.

Perhaps this drive to skepticism is leading market-oriented economists to uncover deep insights about structural shifts in the economy. It’s definitely leading many of them to embrace some wild nonsense, as per these Ricardian Equivalence fallacies. A thousand flowers are blooming, and maybe only 999 of them are wrong. But realistically I think all this is mostly driven by people who don’t like to idea of increased spending not wanting to believe that there are new, event-driven reasons that the people who’ve long favored increased spending are now righter than ever.