Free Exchange sends us to itself last September:
Son of stimulus: LARRY SUMMERS has seen enough. The Wall Street Journal reports:
“I believe the balance of risks suggest a compelling case for a significant fiscal stimulus program that increases the deficit in the short run” but not over the medium to longer term, he said. The program may be most beneficial if it includes new measures for food stamps, unemployment insurance and other policies aimed at supporting low-income families, said Summers. He also argued in favor of new infrastructure investment as well as changes in Medicaid reimbursement rules and new funding to help low-income residents pay their heating bills.
He added that given the long range fiscal outlook, the stimulus should not be structured so as to increase deficits beyond a one or two year horizon. The devil is in the details, of course—how much is on the table, and over what period of time will it be spent? And one wonders whether the Congress will be able to pass something before the fall elections, and, if not, whether conditions will look the same in early 2009.
But two things are very clear. Labour markets are saying that the American economy is in recession, and state and local governments are cutting spending on many of the items mentioned by Mr Summers in a typical, pro-cyclical, constrained-budget fashion. Offsetting those cuts at least seems reasonable, though again, it's hard to render judgment without real numbers to examine.
Summers was then very careful not to give a number, or to anchor the size of the stimulus in any way other than to gesture at the magnitude of the likely future demand gap between spending and potential output, which he put at about $900 billion--$300 billion per year for three years.
If you believe that it is appropriate to use deficit spending to close half of that output gap, that would suggest that a $450 billion fiscal boost program was judged appropriate before Lehman, before AIG.