Best case against fiscal stimulus: From a stimulus supporter: Amidst all this Reinhart and Rogoff mishegas, it's worth saying that I recently read Brad DeLong's [and Laura Tyson's] slideshow about what we've learned about fiscal stimulus since the crisis began and even though he doesn't read it this way I think it contains far and away the most persuasive argument that the "old" (1977-2007) consensus against discretionary fiscal stimulus is still roughly valid. It's right there in his first slide "What We Thought About Fiscal Policy in 2007", which I'll retype:
Near-consensus support of John Taylor's (2000) argument that aggregate demand management was the near-exclusive province of central banks.
Five reasons for near consensus:
- The problem of legislative confusion.
- The problem of legislative process
- The problem of implementation.
- The problem of rent-seeking.
- The problem of superfluity.
Monetary policy was strong enough to do the job. Fiscal policy was simply not necessary.
Now looking back on this the crisis has done a lot to imperil (5), the notion that fiscal stimulus is superfluous. But it's reinforced 1-4.
Even if you assume perfect good faith on the part of each and every member of congress (which seems like a stretch) there's an inherent tension between the desire to do high-multiplier stimulus and the desire to do high social value expenditures. And not only is there empirical disagreement about multipliers, there's complicated and multi-layered disagreement about the social value of different expenditures. And operating in an environment of uncertainty, in which members know that their colleagues are seeking to advance what they believe to be socially valuable expenditures members are rational to worry about ratchet effects. What you get is gridlock and confusion. The old thinking was that a "let's do stimulus now" mentality would lead to overstimulus (and indeed multiple accounts have the Obama administration assuming congress would substantially exceed its ARRA requests) which is wrong, but the general concern about confusion/process/implementation/rents has been [validated].
So we're left with superfluity, and the revelation that whether or not "monetary policy" is in some sense "strong enough" the actual practice of Western central banks is not strong enough.
But the solution to this problem can't be to say "next time congress is going to be way better and less partisan and fiscal stimulus will work out great."