How to Provide Fiscal Stimulus

The editors of Bloomberg give tepid support to a new fiscal stimulus plan:

Some fresh fiscal stimulus wouldn’t go amiss in the U.S. either. Both presidential candidates are calling for a big new effort on infrastructure. Nobody who’s used the country’s roads or airports needs much convincing. U.S. public debt has risen sharply since 2008, and demographic trends will keep pushing it higher in the longer term — but with long-term interest rates at their current depressed levels, borrowing for public investment has never been more affordable. If the money is spent wisely, it will spur growth, which would help to lighten the projected debt load.

And crucially, in the U.S. as elsewhere, judicious fiscal expansion would take the pressure off monetary policy, allowing central banks to stabilize their balance sheets and normalize interest rates faster than they otherwise could.

There’s no need to build bridges to nowhere, or hire armies of unemployed youth to dig and refill holes in the ground. Where opportunities for productive public investment don’t present themselves, governments can cut taxes instead — especially for the low-paid, who’ll be more apt to spend the windfall and thereby boost aggregate demand. Extra public spending also needs to go hand in hand with heightened oversight, to ensure that the resources don’t leak away as waste or graft. And governments do need to keep an eye on long-term fiscal sustainability, which means avoiding open-ended commitments that will permanently increase public spending.

There is a simple, easily administered strategy for providing fiscal stimulus that doesn’t build useless infrastructure, provide a political slush fund for supporters paid out of the public purse, or go primarily to the richest: a payroll tax holiday. If you’re worried about the fund accounting, the amounts that would have been received could be credited to the trust fund’s account.

Keep in mind, however, that orthodox Keynesian doctrine does not tell us that we can permanently expand aggregate product via fiscal stimulus. And that it calls for money borrowed during a downturn to be repaid during an upswing (something we’ve rarely if ever done).

Also, if you think that the Great Recession was a “balance sheet recession” caused by excessive indebtedness and that’s still our problem, fiscal stimulus will not be an efficient remediation of that.