Fiscal Stimulus Beats Doing Nothing -- By a Lot

Last Updated Apr 10, 2009 5:46 PM EDT

Tyler, you write that you "find a lot of wisdom in using monetary policy to regulate aggregate demand and evaluating government spending projects on their own merits." Let me say that I agree 100 percent -- in normal times. Our problem right now is that times are not normal, and that "conventional" monetary policy is tapped out.

So what do we do? One possibility is to sit on our hands -- to say that nothing more is to be done.

The second possibility is to choose to do something along the lines of one or more of three types of policies that are, in normal times, much less effective and less appropriate than standard monetary policies, but that just might work. These three are:
  • Banking sector policy (bank recapitalization and government taking private-sector risk onto its own balance sheet)
  • Printing money
  • Big cyclical deficits
I think that we should be doing some of all three. Tyler Cowen, by contrast, is much more skeptical about all three -- but would favor quantitative easing and only turn to deficit spending and bank nationalization after it has become clear that quantitative easing is not going to be enough.

Now I will go off and think about what facts about the world that might be true would convince me that Tyler is right -- that Plan B should be quantitative easing alone, and that other measures should be reserved for Plan C and Plan D, rather than Plan B being a mix of all three possibilities.

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