Stimulus: The Mainstream View
By Arnold Kling
Peter Orszag does his job, offering the mainstream view on economic stimulus.
When the constraint on short-term growth is aggregate demand, as appears to be the case today, both monetary and fiscal policy can help by boosting spending.
i. On the fiscal policy side, the automatic stabilizers built into the budget will help to attenuate any economic downturn by providing a cushion to after-tax income.
ii. The question is whether additional fiscal action would be beneficial as a complement to monetary policy actions and the automatic stabilizers built into the budget. One way to think about it is that fiscal stimulus can help provide insurance against the risk and severity of a possible recession.
iii. Our estimates suggest that stimulus of between ½ and 1 percent of GDP or so would reduce the elevated risk of recession to more normal levels, as long as the stimulus is well-designed.
My view is less favorable toward the idea. First, this is an election year, which means that politicians are biased toward deficit spending. Second, my guess is that so far we have seen less destruction of paper wealth than we did in the 2000 stock market meltdown. Third, I am not sure how much I believe in the mainstream view of macro.