We awoke to find a hawk on our sill:
"Yah, I'm hot"
Folks are asking what I think of the fiscal stimulus plan: Meh.
It should come as no surprise that I strongly favor monetary over fiscal policy. In fact, I thought we all came to that conclusion over the last 25 years. There is arguably a place for fiscal policy, when the threat of recession is strong and monetary policy is ineffective. Then, you want a fiscal policy that meets the three T's:
- Timely: Stimulus should be enacted immediately (in this case, no later than Q2 2008)
- Targeted: Stimulus should be directed at those who will spend it (and thus increase aggregate demand)
- Temporary: Stimulus should be sudden and short-lived, increasing short-term demand without a long-run structural increase in the deficit
With the exception of timely—I am skeptical that people will see these checks before late summer—the proposed package is not bad. To be sure, it could be much worse. The democratic congress's food stamp proposal, for example, is just ridiculous (although it would have been timely). Senator Clinton's fiscal stimulus package is awful; huge and overly directed, it is political pandering before economics.
But that is what the proposed plan is, too. The stimulus won't do much to ward off recession, but Congress has to do something. Politics, not economics.
The first reason that fiscal stimulus is unneeded is that the economic downturn is not going to be, by any standard, very bad. The latest CBO report says the "CBO does not expect the slowdown in economic growth to be large enough to register as a recession," forecasting GDP growth of "1.7 percent in real terms." This is in line with corporate economist projections of one to two percent real growth.
The second demerit against fiscal policy is that monetary policy is not, at this point, ineffective. With rates at 3.5%, The Fed still has plenty of room to maneuver, and they have shown themselves willing to try innovative approaches. From a paper by Alan Blinder:
Under normal circumstances, monetary policy is a far better candidate for the stabilization job than fiscal policy. It should therefore take first chair. Nothing in this paper is intended to dispute this piece of conventional wisdom. That said, however, there will be occasional abnormal circumstances in which monetary policy can use a little help, or maybe a lot, in stimulating the economy—such as when recessions are extremely long and/or extremely deep, when nominal interest rates approach zero, or when significant weakness in aggregate demand arises abruptly.
We are not looking at an extremely long or deep recession, nor are rates zero.
As an aside, I am a fan of automatic fiscal stabilizers, such as a (slightly) progressive tax system and unemployment programs. As an economy slows, these benefits automatically and immediately accrue, avoiding the institutional effects inherent in other forms of fiscal policy.
"I could kill you without breaking a sweat"
Moments later, the winged beauty swooped down and lit a trolly on fire. Cf., the Chinese variant.
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