Arnold Kling

Hubbard: Economy is Sound

Arnold Kling, Great Questions of Economics
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Glenn Hubbard, Chairman of the Council of Economic Advisers, sees the economy this way:

In short, the stock market decline will not cause consumption expenditure to collapse. House price inflation may well moderate in the next few years but there is no housing bubble about to be pricked. Refinancing has helped maintain consumption growth but has not propped it up. And the economic fundamentals are sound.

Certainly, it is conceivable that the economy will not suffer any more adverse consequences from the decline in the stock market and the end of the refinancing/housing boom. However, the more pessimistic scenarios are at least as plausible. I fail to understand why Hubbard and the Bush Administration are willing to bet on Rosy Scenario, rather than propose further stimulus.

Discussion Question. The Federal Budget has taken a large swing toward deficit, and long-term real interest rates are down. Is there an argument to be made that this constitutes enough stimulus?

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