Final Thoughts: What Would Turn Me Against Fiscal Stimulus

Last Updated Apr 10, 2009 6:12 PM EDT

Let me start off the last day of this debate by detailing things that would make me abandon my position, and rush to agree with Tyler Cowen that fiscal stimulus is just too dangerous a policy to risk using.

As I see it, there are four legitimate reasons to fear that undertaking a fiscal boost now will bite us badly later.

  1. The first is the risk of bottleneck inflation. In this scenario, the fiscal boost increases spending as intended. But we quickly find ourselves back where we were in the 1970s.
  2. Capital flight and exchange-depreciation-driven inflation will take root, and that as the dollar falls rapidly the dollar prices of imported goods and services will rise -- and we are off to the inflation races again.
  3. Government borrowing will push up interest rates, discouraging private investment and leaving us with a low productivity-growth recovery dragged down by anemic private investment.
  4. We will wind up paying high interest rates on the money we borrow to fund the stimulus. The costs of servicing the added debt would then turn out to be a heavy burden.
In each of these scenarios, however, we can see the storm clouds approaching -- in the form of prices of bottleneck goods and wages of bottleneck workers rising rapidly, of a collapsing dollar, of rising medium-term corporate interest rates, or rising long-term Treasury bond rates. So far, we have seen none of these signs.

But if we do, then I will reverse course and become Tyler Cowen's acolyte.

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