Notes on Fiscal Stimulus

I believe the fiscal stimulus worked, better than people think. I think the monetary measures and the bank interventions by the Fed were infinitely more important, but the stimulus worked and was also important. It could have been better. If it would have been a 100% transfer of federal dollars to the states, enough to counter the susbstantial state spending cuts, we would be in much better shape now. But we would be in much worse shape without the measures our government did do. Isn't this obvious? Any resident of Arizona should say so in that without the money from the federal government our state would have been forced into some pretty severe cuts sending more people to the unemployment lines and degrading further already slumping state services.

You can make valid points that beyond the money to the states, the stimulus was of dubious value, the fed cannot just ramp up government projects, these things take way too long to have noticeable effects, and worse, to the degree you do rush them out, you are likely ending up funding stuff with of dubious value all while incurring long term additions to our debt.

And don't get me started about the tax cuts that were a pretty significant portion of the stimulus that somehow Obama gets no credit for from the Republicans. Tax cuts are stimulant - but do nothing to help people who have lost their jobs. The rest saved portion of the increased income or paid down debt - which is good overall, but doesn't do much to boost our economy right now. Especially since an increased savings rate is not translating to increased investments. Its just money sitting in the bank putting nobody back to work.

Well, if you really believe in countercyclical stimulus (and you should), then you need to do better about planning ahead as noted here.

" Beyond that, it seems to me that fiscal stimulus will work well in countries where it is believed that fiscal stimulus will work well.

What do I mean by this? Well, one obvious point is that a country that understands stimulus should experience an immediate jolt to confidence when stimulus is enacted. But other factors are likely to be more important. A country committed to stimulus will take care to prepare to use stimulus. It will construct a system of automatic stabilisers that provide immediate countercyclical aid as an economy deteriorates. It may have a backlog of needed infrastructure projects at the ready, which can be rushed into action as conditions warrant. A country generally sceptical of stimulus, on the other hand, will reach for it in an emergency and find that it is unprepared. Automatic stabilisers will be too small and will require constant Congressional maintenance. Too few projects will be shovel-ready. The need to legislate will lead to inclusion of pork items that aren't particularly stimulative. Stimulus will be less targeted, timely, and effective as a result."

What's frustrating to me is that we have a Republican party who wants to stimulate when our economy is booming and undertake austerity in a time of recession. It would have been like Joseph counseling the pharoah to just throw wild corn parties the first seven years, and hold tight to whatever was left during the second seven. Cynical?

The Republican party instituted the "Bush Tax Cuts" when we had low Clinton deficits and low unemployment. This extra cash helped to feed what would turn into a housing bubble (which low Greenspan interest rates also helped to inspire).

But if you believe we need government investments in our infrastructure (remember the falling bridge or the levies that failed), if you care about clean water that predictably flows from our pipes, and parks and libraries and innovation, then why not stock pile cash and projects during the booms and wait for the inevitable bust to take advantage of available labor?

Call me the anti-Republican (not necessarily a Democrat).