Thursday, January 24, 2008
On this day:

Economists weigh in on the fiscal stimulus plan

Greg Mankiw:
"...given where the economy is right now and the best forecasts of where it is heading, the fiscal package seems unnecessary as a short-run measure, while in the long run adding to the debt burden without doing anything to improve incentives for economic growth."

Russ Roberts:
"...stimulus schemes based on giving people money have a poor track record of energizing the economy. Usually, the only thing that gets stimulated is a politician's approval rating."
Don Boudreaux:

"To no one's surprise, politicians are rushing in with various plans for helping the economy. Most of these plans involve "stimulus." The calls are loud to put more money into the hands of ordinary Americans in hopes that they will spend – not save – it, thereby boosting the overall economy.

"Such stimulus, however, is futile. Government cannot create genuine spending power; the most it can do is to transfer it from Smith to Jones. If the Treasury sends a stimulus check to Jones, the money comes from taxes, from borrowing, or is newly created. ...

"The best way for policymakers to foster... growth is to avoid panicking over any current economic downswing. Instead, they should focus on getting the economic fundamentals right. Such emphasis might not make things better – or even make things appear to be better – today, but it will make our tomorrows as bright as possible."
Alex Tabarrok:

"As the economy slows many people from Larry Summers to Martin Feldstein are calling for a fiscal stimulus. I am not convinced. Spending and tax decisions can rarely boost an economy.

"First, the money for any new spending or tax cuts has got to come from somewhere, right? Thus there is usually substantial crowding out of any stimulus.

"Second, by the time the new spending or tax cut gets through the political process the economy has moved on and the stimulus is no longer relevant except by accident.

"Third, there just isn't that much discretionary spending to play with and even a large increase in spending, say tens of billions, is too small to make much of a difference in a 13 trillion dollar economy.

"Fourth, in their desperation to "do something" politicians will often do something foolish. If a spending increase or tax cut isn't worthwhile on its own merits then it's highly unlikely to be worthwhile once we add in the benefits of "stimulus." Thus, it's one thing to argue for extending unemployment benefits as a matter of welfare it's quite another to think that an increase in unemployment benefits will so increase spending as to reduce unemployment! (The implicit view of Larry Summers.)

"Economists may call for "temporary," "conditional," and "targeted" stimulus but they won't be the ones designing the plan. Spending increases and tax cuts are policies with long term consequences that we need to think about carefully.

"Thus, I do not favor a fiscal "stimulus" package."

Bruce Bartlett:

"In short, there is virtually no empirical evidence that tax rebates are an effective response to economic slowdowns. The increased personal saving doesn't help the economy because the federal budget deficit, which can be thought of as negative saving, offsets all of it in the aggregate. The main benefit of a tax rebate would seem to be political -- giving politicians a way of appearing to be doing something about the nation's economic problems that is superficially plausible.

"A new rebate probably won't do much harm. But anyone who thinks it will prevent a recession -- if one is actually in the pipeline, which is not at all certain -- is dreaming."
Arnold Kling:

If unemployment were to spike up toward 10 percent, I would be very sympathetic to attempting Keynesian remedies, including monetary expansion and deficit spending. But for now, the main "crisis" motivating "stimulus" is the fact that this is an election year.