Friday, January 18, 2008

Fiscal Stimulus? We Don't Need No ...

All of the recent discussion of fiscal stimulus is very disappointing to an economist and deficit hawk like me. I'll ask two questions in this post and highlight them in bold.

Over the past few years, cheap credit and imprudent lending policies by some bad actors generated excessive consumption and investment in the real estate sector. This boosted economic activity beyond the level that would have prevailed with policies that we now wish, with hindsight, had been in place. That level of economic activity is the starting point for discussion of a recession, defined as two consecutive quarters of negative growth in real GDP. If we acknowledge that bad loans fueled the activity, why is it now a widely shared policy objective to maintain that level of activity?

The buzzwords for the stimulus discussion are that whatever the government does, it should be "timely, targeted, and temporary." Much of the discussion centers on a tax rebate, which would primarily boost consumption. Treasury Secretary Paulson is quoted as follows:
Asked if tax rebates to individuals - reportedly one of the cornerstones to the stimulus plan - is an effective course, Paulson said, “the evidence from [the] 2001 [rebate] was that people spent between a third and two-thirds of the money and spent it quickly, so the lesson here is we need to move quickly and do something in enough size.”

Forget the "stimulus" label, this is merely additional deficit spending. There is no discussion of repaying the money through higher taxes in the near term. Based on the President's remarks this morning, the deficit bill will be for about $150 billion. So this proposal is just another $150 billion of some future generations' resources that we will be using for our own consumption today. Why are we entitled to pass them this additional debt?

My views of how the government should conduct fiscal policy are presented here. We should expect some cyclical widening of the deficit with no change in policy. But if we have no intention of balancing the budget over the business cycle (i.e., of running an additional $150 billion surplus when the economy turns around), then we have no business pushing this deficit bill forward now.

UPDATE: Bruce Bartlett provides some background on tax rebates at the WSJ online and concludes:
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. It's an insult to Keynes even to call a tax rebate Keynesian economics. It should be called "feel good economics" because its only real effect is to make politicians feel good about themselves and buy re-election with the public purse.


eightnine2718281828mu5 said...

If we acknowledge that bad loans fueled the activity, why is it now a widely shared policy objective to maintain that level of activity?

I see it mainly as slowing the descent, not maintaining the peak. And it's also a delaying tactic to allow population and productivity growth to provide organic support for economic activity in the near future.

Why are we entitled to pass them this additional debt?

"Reagan proved deficits don't matter"
-Dick Cheney

And Cheney didn't mean economically; future generations vote in very low numbers. :-)

Edward Charles Ponzi Jr. said...

Here is why i think all stimulus will fail:

We are ALREADY running gov deficits.
We are ALREADY living with negative interest rates.
We are ALREADY expanding TCMD
We are ALREADY growing M3 ~15%
We are ALREADY feeding Wall st candy cookies and cake
We are ALREADY getting billions every day from BOC/BOJ/WTF

Executive summary:



Independent Accountant said...

Ludwig Von Mises said, "Only the government can take a perfectly good commodity like paper, slap some ink on it, then render it totally worthless". Good luck with the paper dollar.