Tyler Cowen: Timeo Stimulus Dona Ferentes
Tyler Cowen fears fiscal stimulus:
Marginal Revolution: Fiscal stimulus and German unification: For all the talk about the Great Depression, we are missing one historical analogy for a program of large fiscal stimulus, namely Germany after the Berlin Wall came down. The two countries united, lots of money was spent and lots of money was borrowed. West Germany had a modern economy with both manufacturing and services. At the time Germany had unemployed resources, especially if you count the labor moving from East Germany to West Germany as grossly underemployed and available for higher-return projects. The results were less than wonderful. The higher demand boosted measured gdp growth in the short run (bananas and porn, plus reconstruction) but Germany fell into economic stagnation.... The higher taxes and debt then kept the German economy down for many years. Few Germans were happy with the economic fallout from this "stimulus." And that was with a relatively well-functioning financial system and a reasonable amount of initial optimism. You can list many dissimilarities between German unification and the current U.S. situation...
The big difference, of course, is that the German central bank did not play ball with the program. The Bundesbank upset the applecart by offsetting expansionary fiscal policy with extremely contractionary monetary policy.
I don't know anybody who thinks fiscal policy boosts output if the monetary authority doesn't play ball. But right now Ben Bernanke is not only playing ball, he is funding the construction of an entire new stadium...
