Last Updated Apr 10, 2009 5:46 PM EDT
Brad, you and I agree that aggregate demand is a problem (though probably you see it as a bigger issue than I do). But even if we play only on the turf of aggregate demand, and neglect sectoral shocks, we still don't totally agree. My response is to use monetary policy to keep spending high, to the extent that is necessary.
There is a common view that we are in a "liquidity trap" and that swapping cash for T-Bills won't have significant effects. In my view, inflating the currency is one thing the government is very good at. It's not that hard for government to print more money and get people to spend it, with or without a channel through short-term interest rates. If we have the will to enact an $800 billion fiscal stimulus, we have the will and the credibility to bring about mild inflation.
Or put it this way: it is easier to print money than to borrow it (and then raise taxes to pay it back). Note that if there is truly a liquidity trap, the fiscal multiplier also won't be very potent because the money will disappear into hoards; you can't have it both ways.
I would be very surprised if half of the people employed by the stimulus funds were otherwise unemployed; I'll guess 30 percent at best.
Parts of the stimulus plan consist of projects worth doing in their own right, whether in times of crisis or not. It doesn't make sense to oppose the bill in its entirety. But still I find a lot of wisdom in using monetary policy to regulate aggregate demand and evaluating government spending projects on their own merits.
Follow Blog War over the federal stimulus package:
- Monday, April 6, Brad DeLong: The Stimulus Package: Like the Housing Bubble, Only Better
- Monday, April 6, Tyler Cowen: Good Policy, Bad Timing: How the Stimulus Package Could be Smarter
- Tuesday, April 7: Tyler Cowen: Stimulus Won't Help U.S. Industry Restructure Itself
- Tuesday, April 7: Brad DeLong: Arguments Against Fiscal Stimulus Exhibit a "Deep Incoherence"
- Tuesday, April 7: Tyler Cowen: It's Easier For the Government to Print Money Than to Spend It; Or, Monetarism Rulz!
- Tuesday, April 7: Brad DeLong: Fiscal Stimulus Beats Doing Nothing -- By a Lot
- Wednesday, April 8: Brad DeLong: Why the Geithner Plan is Good Medicine for the Banking System
- Wednesday, April 8: Tyler Cowen: The Geithner Plan: An End Run Around Congress
- Thursday, April 9: Tyler Cowen: Coming to Grips With the End of Debt-Fueled Consumption
- Thursday, April 9: Brad DeLong: Yes to Economic Restructuring; No to Universal Bankruptcy
- Friday, April 10: Brad DeLong: Final Thoughts: What Would Turn Me Against Fiscal Stimulus
- Friday, April 10: Tyler Cowen: The Economy is in Too Much Trouble for Stimulus to Help