Annoying Arguments About Fiscal Stimulus


Advocates like myself of renewed fiscal stimulus for the US, Germany and some other EU countries have to answer a lot of weak arguments. One that especially riles Paul Krugman's cult-followers is the idea that balancing a nation's budget is exactly like balancing a household's budget. Well, they're right about that: it isn't, for the reasons Krugman tirelessly points out.

One qualification: when a nation's budget deficit does have to be curbed, the prudent household story is not a bad political tool to use. Margaret Thatcher deployed it to good effect when it mattered. Meryl Streep has a little speech on the subject in The Iron Lady. My inner pragmatist says politicians shouldn't be too squeamish about using bad economics in a good economic cause.

Still and all, it's annoying. Simon Wren-Lewis points to two more species of annoying anti-stimulus arguments. (1) Arguments that ignore the zero lower bound for interest rates, and (2) arguments that say fiscal stimulus is Econ 101, and the profession has moved on. I've nothing to add to Wren-Lewis's critque of that pair. When you're right, you're right.

But I noticed that one of Wren-Lewis's commenters said we should also acknowledge, for the sake of balance, a few annoying pro-stimulus arguments. (1) Arguments that invoke the ZLB but ignore inflation. (2) Arguments that ignore the possibility that temporary fiscal stimulus might lead to a permanent increase in government spending. "There's nothing so permanent as a temporary government program"--Milton Friedman. (3) Pro-stimulus arguments that ignore the possibility of tax cuts.

I don't quite follow (1). If the risk of inflation argues against further stimulus (monetary or fiscal) then you shouldn't be at the ZLB in the first place. But I think (2) and (3), folded together as they probably should be, are indeed annoying: Arguments that regard the size of government as a non-issue. Maybe, as another of Wren-Lewis's commenters says, this is a political judgement more than an economic one, but let's not disdain political economy. Advocates of strong stimulus in the US undermined their case in 2009 by arguing so strongly in favor of spending increases over tax cuts.

I'd like to nominate three more annoying pro-stimulus arguments. (4) Arguments failing to acknowledge that some level of debt is too much. What's the limit to further fiscal expansion? (5) Arguments that assume the bond market won't abruptly change its mind about the US cost of borrowing. I find it very annoying when liberals, of all people, tell me that the bond market is a wise forecaster. (6) Arguments that dismiss the tax consequences of ever-mounting debt. Yes, we will owe it mainly to ourselves, but eventually somebody's taxes will still have to rise to service the payments.

On a rough count, I'm thinking, the pro-stimulus camp's annoying arguments may outnumber the other side's. Could that be where we've gone wrong? We're still right, but we haven't made the best possible case.

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Clive Crook is a senior editor of The Atlantic and a columnist for Bloomberg View. He was the Washington columnist for the Financial Times, and before that worked at The Economist for more than 20 years, including 11 years as deputy editor. Crook writes about the intersection of politics and economics. More

Crook writes about the intersection of politics and economics.

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