Focus on Stimulus

Focus on Stimulus

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In a July 8 commentary, Nobel Prize-winning economist Joseph Stiglitz defends stimulus spending and Keynesian economics. Says Stiglitz, “Keynesian economics worked: if not for stimulus measures and automatic stabilizers, the recession would have been far deeper and longer, and unemployment much higher.”

On July 1, economist Mark Zandi testified before the House Budget Committee. He argued that stimulus has been effective and that additional stimulus is justified by economic conditions. Among the options for further stimulus that have the highest bang-for-the-buck are an extension of unemployment compensation and general aid to state and local governments. The former would raise GDP by $1.61 for each $1 of budgetary cost and the latter would raise it by $1.41, according to Zandi. Reductions in tax rates, by contrast, would raise GDP by about 33 cents for each $1 of revenue loss.

Also on July 1, Stanford economist John Taylor testified at the same hearing that stimulus has had no demonstrable effect. Indeed, he believes the rise in debt is a key factor holding back growth.

In a June 28 paper, Federal Reserve Bank of San Francisco economist Daniel Wilson estimated the “jobs multiplier” from the 2009 stimulus bill. As of March 2010, about two million jobs had been created or saved by the legislation.

In a June 17 commentary, economist Giancarlo Corsetti argued that fiscal consolidation can be stimulative by reducing market risk. But the timing of consolidation is critical. He presents a more detailed version of his argument in the May issue of the American Economic Review. Ungated version here.

In a May 27 column, University of California, Berkeley, economist Brad DeLong argued that the recent rise in bond prices indicates that the government still has plenty of room to stimulate the economy with fiscal policy without crowding private borrowers out of the market.

On May 25, the Tax Policy Center’s Howard Gleckman criticized the mini-stimulus bill being debated in Congress for extending 70 expiring tax provisions at a budgetary cost of $28.5 billion over two years despite little or no evidence that they will stimulate employment.

In a May working paper, economists Giancarlo Corsetti, André Meier and Gernot Müller look at fiscal multipliers. They find that they are modest during normal times but can be quite large during a financial crisis.

In an April paper, Harvard economist Alberto Alesina argues that large fiscal contractions need not necessarily cause a recession. However, he strongly recommends that such contractions take the form of spending cuts rather than tax increases. On June 30, Business Week profiled Alesina.

Also in April, London School of Economics economist William Buiter examined the circumstance under which further coordinated global fiscal stimulus would be justified.

Note: I previously posted links regarding fiscal stimulus on June 8.

Bruce Bartlett is an American historian and columnist who focuses on the intersection between politics and economics. He blogs daily and writes a weekly column at The Fiscal Times. Read his most recent column here. Bartlett has written for Forbes Magazine and Creators Syndicate, and his work is informed by many years in government, including as a senior policy analyst in the Reagan White House. He is the author of seven books including the New York Times best-seller, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy (Doubleday, 2006).

Previous posts:

July 9: Weekly Roundup
July 8: Focus on State and Local Governments
July 7: Focus on Africa
July 6: Pensions and Aging

Bruce Bartlett’s columns focus on the intersection of politics and economics. The author of seven books, he worked in government for many years and was senior policy analyst in the Reagan White House.