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Fiscal Stimulus versus Fiscal Austerity

July 8th, 2010 . by economistmom

In case you missed it, on the 4th of July CNN’s Fareed Zakaria (on his “GPS” show) hosted a debate between Paul Krugman and Niall Ferguson (video embedded above; link to video on CNN site is here).

But as I’ve mentioned before, I don’t think it has to be a “versus” situation.  We can do both, and in fact, that would be the ideal combination of strategies to promote both a better outlook for the federal budget as well as a stronger longer-term economy.  Last week I did a radio show on Minnesota Public Radio with UC Berkeley’s Alan Auerbach (you can listen here –the first few minutes are the most relevant), and both of us were singing that tune. And if you keep watching the CNN video until you get to Fareed’s own conclusion–following his careful consideration of Krugman’s and Ferguson’s different sides of the issue–you’ll notice he seems to feel the same way.

7 Responses to “Fiscal Stimulus versus Fiscal Austerity”

  1. comment number 1 by: Stayathomedad

    In the face of the collapse of shadow money (easily traded assets & their value), your mother’s intuition tells you to increase expediture on consumption — things which consume value — while taking away resouces and demand from assets which produce additional goods and provide further stores of value?

    Really?

    What kind of mother would want that?

  2. comment number 2 by: VAT Brat

    Keith Hennessey has an excellent post that looks at the mathematics of Krugman’s assertions that short-term deficit spending on a stimulus will improve the long-run fiscal situation.

    Basically, Krugman is making the identical claim that supply-siders make when they claim that tax cuts pay for themselves in the long-run. Krugman’s formula is that deficit spending pays for itself in the long-run. Paul Krugman. Meet Arthur Laffer.

    First, let’s acknowledge the fact that Krugman was awarded his Nobel Prize for his anti-Bush opinion pieces in the NY Times rather than for his economic acumen. He’s a partisan hack who is writing about stuff outside his field of expertise. To read an economist dismember Krugman’s credibility please read Prof. David Levine’s smackdown of this pompous ass.

    What we need is a President who will step up to the plate and say “Taxes must be raised on the middle class and the rich to pay for all the stuff I think you need from the federal government. I must break my campaign pledge in the same way that George Bush 41 broke his in order to restore fiscal sanity to the budget process. It’s the honest thing to do.”

    Of course, Obama won’t do this because he’s a coward and he’s dishonest. He doesn’t have the courage to lead so he outsourced the problem to a Commission to give him political cover. And the Concord Coalition, under its non-partisan deep cover mask, is aiding and abetting this process.

  3. comment number 3 by: AMTbuff

    Fiscal stimulus is of dubious value when everyone knows that the other shoe of anti-stimulus will drop in the next few years, and that the amount of anti-stimulus will increase more than one dollar for every dollar of stimulus spent today.

    Keynsian stimulus arguments rely on the assumption that people will not anticipate and prepare for the hard times ahead when the government is forced to balance its books. This assumption is wrong.

    The most stimulative policy possible now would be to enact massive cuts in promised entitlements, eliminating the overhang of unsustainable spending commitments. Add a VAT to close any remaining gap, and the stock and bond markets would be elated.

    The only stimulus we need right now is fiscal sanity.

  4. comment number 4 by: Arne

    Me Hennessey’s numbers fail the sniff test. He has sending $1T into the economy causing a $600B increase in spending. As it cycles through the economy, it should produce more than $1T.

  5. comment number 5 by: AMTbuff

    A multiplier of 0.6 is not at all unreasonable. If people see trouble ahead, they will tend to save any extra money to prepare rather than increasing their current level of spending.

  6. comment number 6 by: Arne

    So, someone who does not believe that government stimulus will work will save the money and have a lower personal contribution to the multiplier than someone who believes that stimulus will work and chooses to spend the money.

    Is that what you call faith-based economics?

  7. comment number 7 by: Some Guy

    The idea that the government should “balance its books” is frankly crazy. Whopping Keynesian New Deal job-oriented stimulus is what the US and other economies need right now. Since in the real world, federal spending need not be “paid for” by taxation, only irrational or ignorant people would save for future taxation. This might include a lot of people who have gotten their economic beliefs during the last 30 years, the dark age of macroeconomics. But not really, humans just don’t behave that way, as David Ricardo well knew. Krugman’s problem is that he does not go far enough, though James Galbraith and others may be convincing him. But looking at empirical evidence is always good, and Krugman’s last few columns prove his points well. The New Deal did lift us out of the Depression, before WWII, smacking down unemployment to single digits before a short misguided austerity period. And if you want to worry about debts and deficits (= private financial assets & savings) - some people like to worry about deficits, some people like to worry about alien abductors - free-spending FDR left the nation in better imaginary financial worry shape than tightwad Hoover.