Feldstein for Fiscal Stimulus
By Arnold Kling
Martin Feldstein, writing in the Wall Street Journal (subscription required), makes the case for fiscal stimulus.
The shift of the cyclically adjusted federal budget from a $108 billion surplus in 2001 to a $117 billion deficit in 2002 added $225 billion to aggregate demand last year, helping to achieve the 2.7% GDP growth. The Congressional Budget Office now projects that the cyclically adjusted deficit will rise by only $32 billion in 2003 — less than 0.3% of GDP — and that this will be reversed by a $36 billion fall in 2004.
Feldstein is worried about the prospects for gridlock.
The negotiations between Congress and the administration could lead to a choice between enacting both the president’s and the Democrats’ plans or a stalemate in which both are rejected. To reduce the risk of a new downturn and increase the prospect for solid growth in the years ahead, it would be far better to accept some combination of both plans than to have no additional fiscal stimulus.
For Discussion. What are the pros and cons of relying solely on monetary policy to pull the economy out of recession?