Tyler Cowen on fiscal stimulus
By Scott Sumner
Here’s Tyler Cowen in Bloomberg:
In Keynesian theory, fiscal policy only works well if you use it in down times and pay off the bill during a boom. Trump seems ready to do the opposite by upping spending as the economy approaches full employment. After that? Recent history suggests that many countries switch back to austerity precisely when they shouldn’t. That is a reality proponents of “spend more now” have to reckon with, and it means stimulus can bring a bigger contraction in the future than the boost it gives today.
For years, I have been reading about evidence that the 2009 fiscal stimulus promoted by the administration of President Barack Obama was good for the American economy. Study after study shows that it boosted GDP across a two- to three-year time horizon, as indeed it did. Furthermore, some parts of the stimulus truly were beneficial, for instance the aid to state and local governments that limited the need for temporary layoffs. But a serious evaluation of the Obama stimulus, and its longer-term consequences, remains to be done.
Tyler’s right that if the Keynesian model is true, then fiscal stimulus right now would make the economy less stable (as I pointed out in my previous post.) But I don’t think the Keynesian model is true, and hence I’m not particularly concerned about that issue. (Instead, I’m concerned that fiscal stimulus will worsen the public debt problem in future decades–the deficit numbers being bandied about are frightening.)
Tyler links to nine studies that supposedly show the 2009 stimulus package was successful in boosting RGDP over a period of several years. But are those studies reliable? The ones that I have read don’t even come close to showing what they claim to show. Let’s review the evidence:
1. The recovery from the 2009 recession was weaker than the Obama administration forecast, indeed weaker than the forecast path if there were no fiscal stimulus.
2. In theory, fiscal stimulus should have no effect if the central bank is targeting inflation at 2%. The central bank is targeting inflation at 2%. Any empirical or theoretical study that does not account for monetary offset is useless. Some of those studies use cross sectional data, which tells us nothing about aggregate effects, for standard fallacy of composition reasons.
3. Keynesians said the 2013 austerity (when the deficit suddenly fell from about $1050 billion to roughly $550 billion) was a test of the proposition that monetary policy could offset fiscal austerity. Monetary policy passes the test with flying colors–as growth sped up in 2013, as compared to 2012 (Q4 over Q4). So when the stimulus models Tyler alludes to were actually tested in the real world, they failed.
4. Ben Bernanke headed the Fed in 2009. He was a student of history, and his primary desire was to avoid repeating the mistakes of the Great Depression. Recall that he believes that Fed passivity caused the Depression. Avoiding that outcome was his overriding goal. Do you really think he would have just passively sat back if there had been no fiscal stimulus, and not have done any monetary offset?
If someone wants to show me studies that do account for monetary offset, I’d be glad to look at them. Until then, I will continue to assume that there are not any reliable studies showing that the 2009 stimulus was effective.