Why Stimulus Won't Work

A blog about business and economics.
April 17 2013 11:09 AM

The Old Case Against Fiscal Stimulus Is Still A Strong One

Amidst all this Reinhart and Rogoff mishegas, it's worth saying that I recently read Brad DeLong's slideshow about what we've learned about fiscal stimulus since the crisis began and even though he doesn't read it this way I think it contains far and away the most persuasive argument that the "old" (1977-2007) consensus against discretionary fiscal stimulus is still roughly valid. It's right there in his first slide "What We Thought About Fiscal Policy in 2007", which I'll retype:

— Near-consensus support of John Taylor's (2000) argument that aggregate demand management was the near-exclusive province of central banks.
— Five reasons for near consensus:
Advertisement

1. The problem of legislative confusion.

2. The problem of legislative process

3. The problem of implementation.

4. The problem of rent-seeking.

5. The problem of superfluity.

— Monetary policy was strong enough to do the job. Fiscal policy was simply not necessary.

Now looking back on this the crisis has done a lot to imperil (5), the notion that fiscal stimulus is superfluous. But it's reenforced 1-4. Even if you assume perfect good faith on the part of each and every member of congress (which seems like a stretch) there's an inherent tension between the desire to do high-multiplier stimulus and the desire to do high social value expenditures. And not only is there empirical disagreement about multipliers, there's complicated and multi-layered disagreement about the social value of different expenditures. And operating in an environment of uncertainty, in which members know that their colleagues are seeking to advance what they believe to be socially valuable expenditures members are rational to worry about ratchet effects. What you get is gridlock and confusion. The old thinking was that a "let's do stimulus now" mentality would lead to overstimulus (and indeed multiple accounts have the Obama administration assuming congress would substantially exceed its ARRA requests) which is wrong, but the general concern about confusion/process/implementation/rents has been confused.

So we're left with superfluity and the revelation that whether or not "monetary policy" is in some sense "strong enough" the actual practice of Western central banks is not strong enough.

But the solution to this problem can't be to say "next time congress is going to be way better and less partisan and fiscal stimulus will work out great." We need something else. A lot of things might fit the bill, from stepped-up automatic stabilizers to a higher long-term inflation target. But I'd say the best thing to do would be to change the practice of central banks. Give the Federal Reserve an explicit mandate to level-target aggregate economy-wide spending and authorize the Fed to issue helicopter money directly to citizens when necessary to hit the targets. Then there's no "zero bound", there's no question of monetary impotence, and there's no question of discretionary fiscal stabilization. Then members of congress can go back to the important work of arguing about which programs and valuable and which aren't and how middling programs can be reformed to be more valuable and so forth. Creating a dedicated agency charged with macroeconomic stabilization was a good idea. If it's failed, we need to fire its leaders and replace them with people who'll succeed. If it legally lacks the necessary tools, give it the tools. Print money and give it to people.

TODAY IN SLATE

Politics

The Democrats’ War at Home

How can the president’s party defend itself from the president’s foreign policy blunders?

Congress’ Public Shaming of the Secret Service Was Political Grandstanding at Its Best

Michigan’s Tradition of Football “Toughness” Needs to Go—Starting With Coach Hoke

A Plentiful, Renewable Resource That America Keeps Overlooking

Animal manure.

Windows 8 Was So Bad That Microsoft Will Skip Straight to Windows 10

Politics

Cringing. Ducking. Mumbling.

How GOP candidates react whenever someone brings up reproductive rights or gay marriage.

Building a Better Workplace

You Deserve a Pre-cation

The smartest job perk you’ve never heard of.

Hasbro Is Cracking Down on Scrabble Players Who Turn Its Official Word List Into Popular Apps

The Ludicrous Claims You’ll Hear at This Company’s “Egg Freezing Parties”

  News & Politics
Politics
Sept. 30 2014 9:33 PM Political Theater With a Purpose Darrell Issa’s public shaming of the head of the Secret Service was congressional grandstanding at its best.
  Business
Moneybox
Oct. 1 2014 8:34 AM Going Private To undertake a massively ambitious energy project, you don’t need the government anymore.
  Life
The Vault
Oct. 1 2014 10:49 AM James Meredith, Determined to Enroll at Ole Miss, Declares His Purpose in a 1961 Letter
  Double X
The XX Factor
Sept. 30 2014 12:34 PM Parents, Get Your Teenage Daughters the IUD
  Slate Plus
Behind the Scenes
Oct. 1 2014 10:54 AM “I Need a Pair of Pants That Won’t Bore Me to Death” Troy Patterson talks about looking sharp, flat-top fades, and being Slate’s Gentleman Scholar.
  Arts
Brow Beat
Oct. 1 2014 10:44 AM Everyone’s Favorite Bob’s Burgers Character Gets a Remix You Can Dance to
  Technology
Future Tense
Oct. 1 2014 10:27 AM 3,000 French Scientists Are Marching to Demand More Research Funding
  Health & Science
Bad Astronomy
Oct. 1 2014 7:30 AM Say Hello to Our Quasi-Moon, 2014 OL339
  Sports
Sports Nut
Sept. 30 2014 5:54 PM Goodbye, Tough Guy It’s time for Michigan to fire its toughness-obsessed coach, Brady Hoke.