Do You Trust The Stimulus?
Ryan Avent adds to Greg Mankiw's criticism:
It seems to me that fiscal stimulus will work well in countries where it is believed that fiscal stimulus will work well.
What do I mean by this? Well, one obvious point is that a country that understands stimulus should experience an immediate jolt to confidence when stimulus is enacted. But other factors are likely to be more important. A country committed to stimulus will take care to prepare to use stimulus. It will construct a system of automatic stabilisers that provide immediate countercyclical aid as an economy deteriorates. It may have a backlog of needed infrastructure projects at the ready, which can be rushed into action as conditions warrant. A country generally sceptical of stimulus, on the other hand, will reach for it in an emergency and find that it is unprepared. Automatic stabilisers will be too small and will require constant Congressional maintenance. Too few projects will be shovel-ready. The need to legislate will lead to inclusion of pork items that aren't particularly stimulative. Stimulus will be less targeted, timely, and effective as a result.