Will the bailout give traction? Or just grease the skids when we fall down?


Article examines the impact of timing
Bruce Bartlett at Forbes asks the really important question: Does Stimulus Stimulate?

I think the critics of an activist fiscal policy are forgetting the essential role of monetary policy as it relates to fiscal policy. As Keynes was very clear about, the whole point of fiscal stimulus is to mobilize monetary policy and inject liquidity into the economy. This is necessary when nominal interest rates get very low, as they are now, because Fed policy becomes impotent. Keynes called this a liquidity trap, and I think there is strong evidence that we are in one right now.

The problem is that fiscal stimulus needs to be injected right now to counter the liquidity trap. If that were the case, I think we might well get a very high multiplier effect this year. But if much of the stimulus doesn't come online until next year, when we are likely to be past the worst of the slowdown, then crowding out will greatly diminish the effectiveness of the stimulus, just as the critics argue. According to the Congressional Budget Office, only a fraction of proposed infrastructure spending can be spent before October of next year; the bulk would come long after.

Thus the argument really boils down to a question of timing. In the short run, the case for stimulus is overwhelming. But in the longer run, we can't enrich ourselves by borrowing and printing money. That just causes inflation.

I don't agree that we can spend our way out of the mess. But I do think spending later rather than now will make things much worse.

Oh, and the article gives a pretty good overview of American economic policy and effects in the 20th Century. Worth your time.

— NeoWayland

Posted: Mon - January 26, 2009 at 01:33 PM  Tag


 ◊  ◊   ◊  ◊ 

Random selections from NeoWayland's library


Pagan Vigil "Because LIBERTY demands more than just black or white"
© 2005 - 2009 All Rights Reserved