Three articles about fiscal stimulus caught my attention. The first, "We Need a New Recovery Plan" (The Daily Beast), is by Nobel Laureate Robert Solow. He uses traditional Keynesian rhetoric to describe the current state of the economy: given the deep recession, monetary policy is ineffective and private sector growth is unlikely because of few profitable opportunities. Solow writes, "That leaves a choice between prayer and fiscal policy." Recognizing the country's impending debt growth due mainly to underfunded entitlements, he makes his recommendation.
The right response is stimulus now plus a credible plan to decrease the debt/GDP ratio when unemployment and idle capacity have been reduced to acceptable levels. Unfortunately the federal government doesn’t have much credibility these days. An intelligent, non-suicidal recovery plan might actually help.
The second article, "$26-billion aid package for states becomes law" (The Los Angeles Times), outlines measures in the new Act that will fund cash-strapped states' programs to save the jobs of teachers and other government employees, and preserve Medicaid programs. Increased spending now will be paid for by cutting food stamp funding beginning in 2014 and increasing taxes now on American firms operating internationally. The $26 billion stimulus is probably too small to satisfy Solow but otherwise meets his recommendation of spending now and paying for it later.
The reaction to the bill by many advocacy groups has been predictable and demonstrates the difficulty any Congress and administration will have in reducing future deficits ("Democrats, Advocacy Groups Blast Cuts to Food Stamps to Fund $26B Aid Bill," FOXNews). They oppose the spending cuts to the food stamps program even though the Act would only reduce expenditures to pre-stimulus levels. Paul Ryan (R-Wis) claims that the bill would reward teachers unions who are political allies of the administration and irresponsible states that have been ineffective in controlling mounting debt at the expense of responsible states.
To repeat my oft stated position, I do not have a strong opinion about the effectiveness of stimulus spending. Empirical evidence supporting it tends to be weak and contradictory empirical studies, abundant. The nature of financial crises and regime uncertainty as developed by Robert Higgs are more likely causes of slow growth and lingering high unemployment than a lack of deficit spending. We should encourage private sector growth by removing regulatory uncertainty. I agree with Ryan that we should not reward profligate states; this type of bailout is part of the problem, not the cure. If our choice is truly between prayer and fiscal policy; it is probably as effect and it is cheaper.