The Bogey of Fiscal Stimulus

Fiscal stimulus is a tricky business.

Fiscal hawks also rely on history based arguments.

This brings us back to the premature withdrawal of fiscal stimulus.

Fiscal stimulus is turning into fiscal austerity and a drag on growth.

I am one of those who believe that recovery from the crisis requires fiscal stimulus.

Thanks to a massive fiscal stimulus, China veered away from the abyss in early 2009.

There is much greater scope for fiscal stimulus to boost growth, and much smaller scope for monetary stimulus.

More generally, fiscal stimulus is unlikely to have much lasting effect, as is the case now.

But, this year, with signs of economic recovery emerging, advanced countries have quickly shifted from fiscal stimulus to fiscal consolidation.

This would also allow for greater fiscal stimulus at a time when other components of aggregate demand are slowing.

Some politicians, for example President Barack Obama in the US, herald their fiscal stimulus programs as effective responses to the economic crisis.

Thus, it made sense to pursue a fiscal stimulus of some kind in early 2009.

Stimulus programs were sold as being a temporary palliative, needed to bridge the gap until the financial sector recovered and private lending resumed.

Unfortunately, the fiscal stimulus was not well enough designed to get the economy onto a strong, self sustaining growth path.

So I really cannot understand Barro s last paragraph The fiscal stimulus package of 2009 was a mistake.

It has already aggressively loosened monetary policy, and it can employ further fiscal stimulus.

In order to control inflation and real estate bubbles, the central bank tightened monetary policy and the government refrained from another round of fiscal stimulus.

The government s prompt action to counter the crisis fiscal stimulus, growth packages, and monetary easing proved effective.

They do not have the luxury of cobbling together fiscal stimulus packages or rescuing ailing industries in order to cushion the shock brought about by the economic crisis.

Opponents of fiscal stimulus cynically claim that all such efforts are bound to fail, citing as evidence US President George W. Bush s tax cuts!

Countries had little incentive to make peace with their neighbors as long as they enjoyed the financial support of the US or the USSR.

Rather than fiscal stimulation and control, the main tool of economic management nowadays is monetary policies conducted by independent central banks.

In this environment, a further fiscal stimulus may prove counterproductive, with the extra spending counterbalanced by the negative effect on the housing market of higher interest rates.

Why Stimulus Has Failed

Reducing uncertainty might augment, or even be superior to, fiscal stimulus programs, for it would address the root cause of the unwillingness to spend.

Obama outsourced the details of the 787 billion fiscal stimulus to Congress and, no surprise, the old barons of the House stuffed it with pork and social engineering.

Economists more sophisticated forecasting models also show that the fiscal stimulus had an important positive effect, for much the same reasons as the common sense approach.

Is Stimulus Still Necessary?

That way, if the economy needed another targeted fiscal stimulus in the short run, financial markets would not respond by driving up borrowing costs.

Second, Krugman s claim that a vastly larger fiscal stimulus would have generated a more rapid economic recovery in the US depends entirely on conjecture.

Critics who argue that fiscal stimulus in Japan failed in the past leading only to squandered investment in useless infrastructure make two mistakes.

But there is a broader Reagan type reasoning at work here unemployment is high, the economy is not growing fast enough, and we need a fiscal stimulus.

There was a lot of bank rescue in economic stimulus and there was a lot of economic stimulus in rescuing banks.

Less Bang for America s Stimulus Buck

Stimulate or Die

Despite the impression created, particularly in the US, by media commentary and political debate, fiscal stimulus clearly helped in the crisis, though its impact is diminishing rapidly.

And the cost of carrying the extra debt incurred is extraordinarily low 12 billion a year of extra taxes would be enough to finance the fiscal stimulus program at current interest rates.

Even though the US government is doing other things as well fiscal stimulus, quantitative easing, and other uses of bailout funds it is not doing everything it should.

Given that difficulty, the right way to assess whether the fiscal stimulus enacted in January 2009 had a positive impact is to start with common sense.

All Stimulus Roads Lead to China

It was right to stimulate.

Consolidators versus Stimulators

The policies adopted or discussed by American policymakers and scholars nowadays quantitative easing, fiscal stimulus packages, government deficit reduction seek to cure only the symptoms of a deeper malaise.

It is not clear if deflation can be beaten with monetary policy excessive fiscal stimulus and deferred austerity may make the debt unsustainable and the structural reform components of Abenomics are vague.