The Corner

No, We Do Not Need More Fiscal Stimulus

It’s a line you’re seeing with surprisingly frequent regularity: Ben Bernanke wants more fiscal stimulus. So does Peter Orszag. (Hat tip for these links goes, naturally, to Ezra Klein’s blog.)

Advocates of incessant temporary infusions of cash into the pockets of low- to middle-income people in the hopes that they will go out and spend it and “spur demand” and thus create incentives for businesses to invest and expand and hire sound, to be quite frank about it, totally out of their minds. How many times must they be reminded that businesses invest (and banks lend) with an eye toward long-term economic prospects, asking themselves, “What kind of return am I going to get on this investment over the long run?” Temporary blips on the demand radar of the kind that fiscal stimulus represents do not factor into this decision-making process at all.

The thinking undergirding the assertion that fiscal stimulus is what we need is built on the assumption that there exists some tipping point at which an economic recovery becomes self-sustaining and stimulus is no longer needed. Maybe that is true in certain contexts. But it is clearly not true in this one. What is increasingly clear instead is that businesses are not investing for two reasons:

1. They see no improvement in the debt overhang that is keeping consumers from returning to the kind of overleveraged consumption that fueled the mid-2000s boom, and that’s probably a good thing, but we need to find some middle ground; and

2. They have no confidence in the ability of the American political system to fix its long-term budget problems without massive tax increases that would hit them and their customers incredibly hard.

We can have a long discussion about what the government could and should be doing to better address item 1, whether that be enacting the kind of bankruptcy reform many Democrats have been pushing or simply removing the policies that have kept housing prices from reaching market-clearing levels, as I would prefer. But without getting into that, let me just say that it seems pretty clear that more fiscal stimulus, particularly in the amounts that many liberals are talking about, would make item 2 much worse, because it would worsen the deficit picture from the spending side and increase the amount by which taxes will have to rise to pay down the debt. That tipping point will perpetually elude the stimulators for the same reason the carrot will perpetually elude the donkey. So please, please, enough of this already.

Keynesians, you had your turn at bat. You whiffed. It’s time to try something else.


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