Here is a simple framework: it’s impossible to determine a true output gap because the output produced in 2008 might not make sense in 2010, e.g., homes and automobiles that had willing buyers then might not have willing buyers now. The idea of an output gap is a useful abstraction that needs to be taken with a grain of salt.
One way of thinking about stimulus spending is that some worthwhile activities — building necessary roads, military equipment — are “on sale” during a downturn, and so it makes sense of government to buy in bulk. Of course, this raises difficult questions: how many of these activities are truly worthwhile, etc.? Moreover, new spending programs, including infrastructure spending programs, create new obligations that will endure beyond the downturn. This is why Rivlin and others called for a separate public investment bill that would include long-term revenue enhancers, which could kick in once the economy recovers.
The Obama administration has noted that it cut taxes in 2009. This is true. It also increased spending. When John Cochrane and Brian Riedl note that this spending will eventually have to be paid for in the form of increased taxes or reduced transfer payments, they’re making an important point. Granted, it is possible — let’s say it’s likely — that this is not a perfectly zero-sum arrangement. But I wonder if we’re seeing some wishful thinking on this point, not unlike the wishful thinking advanced by some supply-siders.