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Joe Weisenthal Quotes Sven Jari Stehn on Delong And Summers


Goldman On New Paper From Delong And Summers: Spending Cuts Now Will Be A Disaster: Goldman's Sven Jari Stehn is out with a new note spotlighting new research from economists Larry Summers and Bradford DeLong…. The gist: When interest rates are at zero, spending more to stimulate the economy has a long-run effect of helping the fiscal situation…. Here's Stehn:

In a study presented at the Brookings Panel on Economic Activity on March 22-23 in Washington D.C., Bradford DeLong and Lawrence Summers examine the effectiveness of fiscal policy in a depressed economy. Specifically, they use a simple model to explore the effects of fiscal stimulus in an environment when (1) monetary policy is constrained by the zero bound on nominal interest rates; and (2) a boost to output today brings longer-run benefits for the productive capacity of the economy (for example, by avoiding "scars" or "hysteresis" in the labor market). They call such an environment a "depressed" economy.

They reach two conclusions. First, while the fiscal multiplier is low, perhaps as low as zero, in a normal situation, fiscal stimulus today would be highly effective in affecting output both now and in the future. Second, temporary fiscal stimulus could be self-financing (and may well reduce long-run debt-financing burdens) when one takes into account the effects of present stimulus on the evolution of future output and debt-to-GDP ratios.

Stehn then backs up their work, pointing out that Goldman's own research shows deleterious effects of fiscal consolidation in times like these…