Fiscal Stimulus: Where the Vowel-less Economists Differ
I have enjoyed the comments on economics from fellow vowel-less economist KNZN but his latest two posts on fiscal stimulus have me scratching my head. One claims that the Bush fiscal fiasco was a good thing:
You can reasonably complain about the composition of expenditures or the composition of revenues under the fiscal policies of the last 7 years. But if you think the existence of a deficit – I mean a large deficit – has been a bad thing, you are just wrong. Back in 2006, I went into a lot of theoretical reasons why the deficit might be a good thing. But in the light of the housing crisis, it has become clear to me that there is a very simple reason why the deficit really has been a good thing: we have needed a fiscal stimulus this whole time (except maybe for, hmm, say February and March of 2006).
One could counter that an easier monetary policy (the FED did raise short-term interest rates starting in late 2004) could have generated more investment demand as well as a dollar that depreciated even more, which would have increased net exports. But KNZN notes that we did rely on low interest rates, which he claims led to the current housing fiasco. Later we get from KNZN what the real purpose of fiscal stimulus:
If the purpose of a fiscal stimulus were to stimulate aggregate demand and thereby increase economic activity, then a fiscal stimulus would almost never be a good idea … anything that fiscal policy can do, monetary policy can do better. And monetary policy will do it, because that’s the job of central bankers. And if you disagree with the central bank about whether we need a stimulus, it will do you no good to try to use fiscal policy unilaterally, because the central bank will act to offset the effect with higher interest rates. There is one exception – one case where monetary policy (maybe) just doesn’t work: that is the case where the interest rate is zero … But a monetary stimulus could have another bad effect – rising import prices due to sudden drop in the dollar. The way to avoid that effect is to keep US interest rates high enough to attract capital from abroad, which will prop up the dollar. And the way to do that is with fiscal policy – a policy to produce a demand for that capital, so that someone in the US will be willing to pay those interest rates. Again, the purpose of a fiscal stimulus is to prevent interest rates from going down.
In other words, low interest rates are bad because we like our current account deficit so much that we have to avoid anything that will increase net exports? Also note that a high interest rate policy is one that crowds out investment. OK – if our incredibly low national savings rate is already too much savings, we do need some long-term fiscal stimulus. I guess KNZN has just rationalized the last 27 years of GOP fiscal policy!