The Shouting Match

There is a shouting match going on about what economic policy we should be following. One of the camps whole-heartedly support Keynesian stimulus, the other rejects it. This morning’s exemplars of the divergent viewpoints are columnist E. J. Dionne and Tim Cavanaugh at Reason.com.

Mr. Dionne favors fiscal stimulus. Big fiscal stimulus:

President Obama has only one option as he ponders a world economy teetering on the edge: He needs to go big, go long and go global.

Obama should not be constrained by what the Tea Party might allow subservient Republican leaders in Congress to do. He should state plainly, eloquently and in detail what he thinks needs to happen. Neither history nor the voters will be kind to him if he lets caution and political calculation get in the way.

Going big means immediate action to boost the economy, even though this will increase the short-term deficit. His proposals to continue the payroll tax cut, extend unemployment insurance and enact patent reform are good, but they are not enough.

The federal government needs to come to the aid of state and local governments again; the budget cuts they are being forced to make are precisely what the economy does not need now. We must find ways of boosting spending as quickly as possible on roads, bridges, transit and other building projects, including a new program to rehabilitate the nation’s dilapidated schools. And the administration needs to do far more to resolve the mortgage mess, which is holding back consumers.

Tim Cavanaugh presents the flip side of the coin:

Is it possible that the choice between budget-balancing and job creation is a false choice?

Does government actually create jobs?

Is there any reason to believe at least $2 trillion in fiscal stimulus and $2.9 trillion in monetary stimulus since 2008 have made a positive difference in the economy—especially considering that most economic indicators are worse than the worst-case scenarios that were made public when those spending decisions were approved?

How does a deal that contains no actual cuts, adds to an existing $14 trillion pile of public debt, and preserves spending for cowboy poetry qualify as an “austerity” budget?

And how many times can the Keynesian consensus fail the test of outcomes before it goes away for good?

I’ve already outlined my views here.

Given the recent experience and the country’s serious budget problems (remember: it will require more than $600 billion dollars of combined additional revenue and cuts per year just to stabilize our fiscal situation) I continue to think it’s incumbent on those who propose aggressive fiscal stimulus in the present and even higher taxes and deeper cuts in the future to provide some specifics on how they plan to spend the dough. “Infrastructure spendin” isn’t a specific. “Bridges to nowhere” are infrastructure spending, too. Does maintaining the scheduled step pay increases for big city school district teachers or seniority pay increases for police officers count as effective fiscal stimulus?

3 comments… add one
  • It must be nice living in the fantasy world that E.J. Dionne inhabits. I wish I got paid to write columns that are nothing but wishful thinking.

    Obama needs to “go big?” He’s just the President. He doesn’t control spending or the economy. Any stimulus must come from the House and anyone with an ounce of sense understands that there is no chance of anything approaching Dionne’s fantasies coming out of the House.

    Obama should not be constrained by what the Tea Party might allow subservient Republican leaders in Congress to do.

    Really? How so? Unless one is willing to throw out the constitution and institute some sort of coup, then any spending bill will be constrained by the Tea Party. There’s no getting around it. The President doesn’t have the power.

    I don’t understand how someone who should know batter can write such nonsense.

  • steve Link

    “Is there any reason to believe at least $2 trillion in fiscal stimulus and $2.9 trillion in monetary stimulus since 2008 have made a positive difference in the economy—especially considering that most economic indicators are worse than the worst-case scenarios that were made public when those spending decisions were approved?”

    Cavanaugh is economically illiterate, or at least uninformed. I suggest you stop reading him. We now know that the recession really was much worse than thought.

    Steve

  • We now know that the recession really was much worse than thought.

    steve, IMO there’s another way of saying much the same thing that comports better with the facts of the situation. When the economy is in a bubble productive capacity increases in the bubble commodity. After the bubble has collapsed the bubble commodity has drastically reduced value and, if the overhang in the inventory of the bubble commodity is large enough and the commodity is durable, the productive capacity in the bubble commodity has zero value. Consequently, there is a much smaller output gap than theory would otherwise dictate and calculations of economic activity based on the output gap are doomed to failure.

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