Keith Hennessey produces an interesting taxonomy of different positions on fiscal stimulus:
- Rules over discretion
- Yes on monetary discretion, no on fiscal stimulus
- It depends on the kind of fiscal stimulus (R)
- For two-sided fiscal stimulus
- It depends on the kind of fiscal stimulus (D)
- Fiscal stimulus works and we need a lot more of it through increased government spending
- It’s different here in Europe
Read the whole thing.
I don’t fit handily into any of these camps. I think that all of the attempts at fiscal stimulus either by cutting taxes or by boosting spending over the period of the last decade have been ill-considered but I’m not categorically opposed to the notion. I’d like to see a bit more evidence. Mr. Hennessey echoes something I’ve been saying around here for some time about the pro-deficit spending folks, e.g. Paul Krugman, Robert Reich:
There’s an easy way for Dr. Krugman, Secretary Reich, and other outsiders to resolve this — they could fortify their advocacy for larger short-term deficit increases by specifying the particular policies they propose for medium-term and long-term deficit reduction.
Since I supported the Steve Verdon stimulus proposal, I must be in this camp:
x. It depends on the kind of fiscal stimulus (a pox on both your houses).
“There’s an easy way for Dr. Krugman, Secretary Reich, and other outsiders to resolve this — they could fortify their advocacy for larger short-term deficit increases by specifying the particular policies they propose for medium-term and long-term deficit reduction.”
Heh-heh-heh. Waiting for Godot.
This is nothing more than a variant of my query: “OK, we need some level of taxation for the public good, but what are the limits?” To which the inevitable reply is: “More.”
I’m in between Camp 1 and Camp 2 — I somewhat prefer rule-based monetary policy to discretionary monetary policy, but believe that Fed leadership from Volker through Bernanke have pursued monetary policies within shouting distance of what a good rule-based policy would have given.
However, a casual observer might mistake me for belonging to Camp 3. I favor permanent tax cuts offset by spending cuts, but not specifically as a short-term stimulus. Instead, I favor that policy at all points of the business cycle as a way to reduce the burden of government on personal liberty and to promote the long-term health of the economy. Likewise, I also support revenue-neutral tax reform (such as the Mankiw proposal to immediately and permenantly cut the payroll tax in half, and offset the revenue with a phased-in carbon tax) at all points in the business cycle.
1) Monetary policy first. Monetary only for bubble recessions. When zero bound and it is a financial system caused collapse, then 2.
2) Fiscal Policy. Relatively short term, with a tail.
3) Long term debt reduction. This should have been done absent this recession. A plan for this should be on the table now.
Steve