fiscal stimulus

Robin Harding

Although it seems like a world away, the main economic policy argument in the early summer of 2010 was about the effectiveness of fiscal stimulus, in the wake of the Obama administration’s $787bn American Recovery and Reinvestment Act.

Now that the administration is asking for a new $447bn stimulus that question should be back at the top of the agenda – and thanks to two excellent new NBER papers it is going to be a lot harder for people to distort the economic argument.

Most of the new evidence suggests that in today’s specific circumstances – where the zero lower limit means that monetary policy is not as loose as the Fed would like – then fiscal stimulus could be very effective indeed. Read more

$1,000bn: that’s the estimated fiscal stimulus if current US tax deal discussions come to fruition. Economists have upped their 2011 growth forecasts by 50-70bp on the news; traders have brought forward their estimates of a fed funds raise as yields rose significantly. The policy couldn’t be more different from yesterday’s austerity measures in Ireland.

US citizens at both ends of the pay spectrum would be better off under the deal, paying less tax and therefore having more to spend. Under the current deal – which has some way to go before it is passed – the 2 per cent employee payroll tax cut would be kept, saving some families about $2,000 and costing about $200bn. The main, $800bn part of the deal would extend Bush-era tax cuts across all income groups – including the very wealthy, who are more likely to save the additional income.

Robin writes: Read more

James Politi

Conventional wisdom in Washington is that Ben Bernanke, Federal Reserve chairman, is pretty much alone in his quest to deliver a jolt to the US recovery.

With concerns about the deficit running rampant, Congress is unlikely to push through any significant fiscal stimulus anytime soon, particularly if there is a shift in power with strong Republican gains in the midterm congressional elections. As much as the Obama administration may want to move forward with new economic programmes, it is clearly hamstrung by the headwinds on Capitol Hill.

But not all may be lost…..

A research note by Michael Feroli, economist at JPMorgan, just highlighted some interesting ways in which fiscal policy could achieve what Charles Evans, president of the Federal Reserve Bank of Chicago, recently described as a crucial policy objective: lower short term real interest rates. Read more

Temporary fiscal stimulus can work, but keep priming that pump and the effects wear off. This is the conclusion of research from the Bank of Portugal, investigating whether small euro-area economies are affected in the same way as large ones (conclusion: yes, they are).

Fiscal stimulus is important here, because the single currency limits the monetary options available to euro members. So, the conclusions:

The results reveal that permanent government expenditure increases should be avoided, as opposed to temporary stimulus. This outcome is identical to the one obtained in the literature for large economies.

Lags in the program implementation and limited credibility can however undermine the objectives of a temporary stimulus. In particular, in financial distress circumstances, under which the stimulus may trigger a hike in the country’s risk premium, the effectiveness of the stimulus might be negligible.

So maintaining credibility is extremely important: even the temporary stimulus may have limited or no effect if credibility is low, such as during financial distress. In this case, no action might be the best bet: Read more

Robin Harding

My contribution to Mark Thoma and Motoko Rich‘s call to label the two sides in the raging fiscal stimulus debate. Motoko Rich writes:

The raging debate over what to do about the deficit is now getting its own lingo. Read more