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Tuesday, June 8, 2010

DOES THE USA NEED A NEW STIMULUS PACKAGE?

Today's Buggy Topic

The question posed in the subject-title is accurate enough, with a slant in prof bug's two replies found in a thread at Economist's View:  in particular, though the buggy guy supported President Obama's fiscal-stimulus of slightly over $800 billion that was adopted by Congress in January 2009, he's not certain right now whether we do need a new package.   He's not, mind you, outrightly opposed; just faced with too many uncertainties.  Click here for the buggy stuff, though you should read the rest of the background that follows before you do so.

The Contending Groups

The pros and cons of a new fiscal stimulus program --- or even the desirability of the original --- have divided the economics' profession into two contending camps New Classicals and Keynesians of different sorts.

(i.). New Classical Macroeconomics

Lots of economists say we don't need or want more federal deficit-spending: the growing federal government's overall debt will require higher taxes, entail higher interest rates, and on both counts slow down future long-term economic growth.  On this view, the USA economy --- unusually flexible and dynamic --- has already emerged out of the recession that ended last August (2009) with steady GDP growth greater than that of any other industrially advanced country with Canada not far behind; and though unemployment hasn't come down much, job-creation is always a lagging indicator in the climb out of a recession.  And so unemployment will start going down faster if we continue letting market forces now operate without further fiscal stimulus from Washington D.C. 

As a general thing, these economists are New Classicals who believe one of two things (or both) about countering recessions:

  • The market-economy is self-regulating and self-adjusting, and recessions are signs that old technologies have stopped boosting economic growth, new technologies and sector-reallocation across industries --- say, from overextended housing construction and mortgage finance to new, more promising industrial sectors --- has to be completed before vigorous economic growth returns.  Any government programs --- fiscal or monetary --- to try hastening the revival will backfire, either now or over the long run.  The one exception: permanent tax-cuts that will raise the rate of long-term GDP growth and stimulate current business investment and hence job-creation.

  • Alternatively, some New Classicals believe that a big monetary stimulus in line with Milton Friedman's views are needed to help recover from a serious recession, but they add that is what the Federal Reserve has been doing for the last two years or so, and very few believe that more stimulus is needed in the form of the Federal Reserve buying long-term private-assets, like corporate bonds or mortgages, that would reduce long-term nominal interest rates without having a bad mid- and long-term consequence: raising the rate of inflation and inflationary-expectations.

Click on the "continue" bar immediately below.

  

(ii.).  Keynesians

Other economists --- all old-style Keynesians and some New Keynesians (the latter generally frown on fiscal stimulus, prefer monetary policy stimuli, but worry that with short-term interest rates near the zero-bound limit and hence incapable of additional stimuli to economic and job-growth) --- argue that t. . .

  •  Only a new stimulus package will keep the US economy from sliding back into recession or, alternatively, keeping unemployment too high and at a large cost if we rely only on market-activities to create jobs that would bring the jobless rate down to less than 5.0 - 5.5% . . . never mind 4.5% or so before the serious global recession began in late 2007 in this country. 

These Keynesians argue further that

  • The EU austerity programs, along with the eurozone monetary crisis, have created lots of uncertainty in financial institutions world-wide; and given the degree to which the USA economy's revival depends on overall global economic growth and more specifically on business- and financial-optimism abroad, a new federal stimulus-package is needed to buffer these negative shocks.  Not to forget the Chinese government's determination to keep its own currency fixed to the $US, which will further drain away some of the USA's recovery growth-rate through one of the four channels of aggregate demand: C (private consumption), I (business investment), G (government spending minus taxes), and X-M (exports minus imports). 

Nor is that all.

  • As the linked article that started the thread at Economist's View on this subject showed, much of the federal government's increased spending programs in the fiscal-stimulus package of 2009 have been offset by reduced spending by the 50 states.  If true, then the net impact of government spending has been actually negative.  And so all the more reason for a new short-term federal stimulus policy.

Enter the Buggy Posts

He'd support a new fiscal stimulus if we could be sure that the main theoretical questions that hang over any such stimulus-program could be answered in ways that remove his uncertainty.  No need to set those questions out: they're found at the start of prof bug's first post, then continued in his second in reply to one of the regular posters at Economist's View, himself obviously an economist.