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links for 2008-01-29

Menzie Chinn on the Stimulus Package

He writes:

Econbrowser: How Much Stimulus? Dollar Amounts versus Efficacy: I think a fiscal stimulus of 1 percentage point of GDP to soften the slowdown makes sense -- as long as we get the maximum "bang for the buck" of deficit spending, and the stimulus is not open-ended. In other words, I share Andy Samwick's (and Jim Hamilton's) queasiness about letting the Bush-ian deficit spending/debt building tendencies persist (plenty of documentation here, here and here). In addition, the deficit spending should be aimed at increasing aggregate demand, as opposed to providing a windfall to households and businesses that will only enhance wealth or profits.

In this latter respect, my views are in congruence with Krugman's views that the package agreed to between the Administration and the House (description here) leaves something (okay, a lot) to be desired. The main idea should have been to enhance the automatic stabilizers in the system. One has to ask: Where is the extension of unemployment benefits (as apparently mooted by Senate leaders)? Where is the increase in food stamp payments? (These are two of the four points I mentioned as ideal components in this post.) What is the point of the 1/3 of the package ($50 billion) that will be devoted to accelerating capital depreciation expenses (critiqued here)?

So, I think some serious thought has to be done -- do we want a flawed stimulus package, or should we forego the stimulus if we think that most of the resulting deficit spending will not actually do any stimulating of aggregate demand? At the moment, I think we can -- and should -- try to do better...

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