When can deficit spending in a recession help?
1. When it is part of a stable and sustainable structure of economic policy, so that nobody fears that it is the beginning of a process of rampant inflation or expropriation. In that case deficit spending will have no deleterious effects on investment, and to the extent that it gets more money into the hands of those who are temporarily short of cash it will boost demand and employment.
2. When things are already so bad (as in 1933 and 1934) that there is no investment anyway: if business confidence is already at its nadir, deficit spending cannot do any harm by reducing investment, and does good by putting people to work and boosting their incomes and their demand.
That sounds right to me. And the first point may have something to do with why the Bush tax cuts have failed to restore full employment. After all, investment demand as a share of GDP is still below the levels before 2001.
Update: A reader notes that Tyler was quoting Brad. And I’m remiss for not adding Brad’s ending:
You thus see that my view is closely related to (but not identical to) the short-run long-run distinction you draw. The longer-run are deficits, the more likely they are to cause a crisis of private-sector investor confidence. The shorter-run are deficits, the more likely they are to be part of a stable, sustainable structure of economic policy.
This is an excellent statement of the view that we call Rubinomics. I’ll bet the current CEA has expressed this views, but it seems their political bosses are not listening.