Yesterday in the Financial Times economist Larry Summers made an argument for fiscal stimulus to boost the U. S. economy in the form of a tax rebate or some other similar measure:
Poorly provided fiscal stimulus can have worse side effects than the disease that is to be cured. This suggests close attention to three issues:
First, to be effective, fiscal stimulus must be timely. To be worth undertaking, it must be legislated by the middle of the year and be based on changes in taxes and benefits that can be implemented almost immediately.
Second, fiscal stimulus only works if it is spent so it must be targeted . Targeting should favour those with low incomes and those whose incomes have recently fallen for whom spending is most urgent.
Third, fiscal stimulus, to be maximally effective, must be clearly and credibly temporary – with no significant adverse impact on the deficit for more than a year or so after implementation. Otherwise it risks being counterproductive by raising the spectre of enlarged future deficits pushing up longer-term interest rates and undermining confidence and longer-term growth prospects.
Taken together these criteria suggest the desirability of a programme of equal payments to all those paying either income or payroll taxes combined with increases in unemployment insurance benefits for the long-term unemployed and food stamp benefits. Such a programme could be implemented quickly and would largely benefit those most likely to be cut off from credit markets and with the most urgent need to spend. It could easily be made temporary. Ideally, further stimulus would be provided by measures to reduce future deficits and increase long-run confidence.
He suggests a stimulus of $50 billion or so.
Greg Mankiw has argued in favor of dealing with the problem via monetary policy. Greg Ip similarly argues in favor of monetary policy. Tyler Cowen argues against fiscal stimulus.
I’m no economist but I find the proposal somewhat puzzling. By my calculation $50 billion constitutes .4% of the economy. That sounds like a pretty small stimulus to me. Is whatever problem exists with our economy the result of not enough consumer spending? We just had a little annual spurt in consumer spending, up from last year’s but not dramatically so. That doesn’t seem to have solved the problem. Will a significantly small spurt six months down the road, Christmas in July, help a lot more?
If the problem is not enough consumer spending, is it because we’re not buying enough clothes and consumer electronics or because we’re not buying enough houses and cars? An additional $500 might tempt me to buy a new suit or a new LCD TV but it won’t make me want to buy a house or car and it certainly won’t tempt the bank into lending me the money to do it with. A spurt in low to midprice consumer goods sounds like an economic stimulus for China to me.
It’s very possible that I’m missing the big picture on the financial issues that are bedevilling the economy but it sounds like a confidence problem to me rather than one that will readily be cured with fiscal stimulus or even interest rate cuts, confidence that those selling packages of mortgages and those evaluating risk know what the heck they’re doing and can be trusted. I read it as a market failure in the financial markets. Please correct me, someone who’s more knowledgeable than I.
