A Manifesto for Stimulus Spending

My training is primarily in microeconomics.  I know enough about macroeconomics to discuss it but not enough to lose my humility.  As I explain below, I do not support additional stimulus spending but many do including forty economists and historians including three Nobel Laureates (Stiglitz, Maskin, and McFadden) who signed a manifesto in the Daily Beast.  The manifesto reads ("Get America Back to Work"),

Fourteen million unemployed represents a gigantic waste of human capital, an irrecoverable loss of wealth and spending power, and an affront to the ideals of America. Some 6.8 million have been out of work for 27 weeks or more. Members of Congress went home to celebrate July 4 having failed to extend unemployment benefits.

We recognize the necessity of a program to cut the mid- and long-term federal deficit but the imperative requirement now, and the surest course to balance the budget over time, is to restore a full measure of economic activity. As in the 1930s, the economy is suffering a sharp decline in aggregate demand and loss of business confidence. Long experience shows that monetary policy may not be enough, particularly in deep slumps, as Keynes noted.

The urgent need is for government to replace the lost purchasing power of the unemployed and their families and to employ other tax-cut and spending programs to boost demand. Making deficit reduction the first target, without addressing the chronic underlying deficiency of demand, is exactly the error of the 1930s. It will prolong the great recession, harm the social cohesion of the country, and continue inflicting unnecessary hardship on millions of Americans.

I believe that the manifesto oversells government's ability to "fine tune" the economy in the first sentence of the second paragraph.  Nearly all economists recognize the need for deficit and debt reduction, but waiting until the mid- and long-term is probably politically not feasible.  Students of economics know that an economist's definitions of mid- and long-term is not precise, nor are the men and women who signed the manifesto clear about when deficits need to be reduced, presumably after more robust employment has been achieved.  Given that much of the future deficits will be caused by underfunded entitlement programs such as Social Security and Medicare, the reluctance of the electorate to support entitlement cuts or tax increases, and the reluctance of politicians to buck the will of the electorate, I have doubts that our collective institutions can reduce the structural deficits.

The third paragraph is a Keynesian plea for funding an extension of unemployment benefits through deficit spending.  I believe that a good humanitarian case can be made for extending the benefits but not through deficit spending.  The manifesto claims that "Making deficit reduction the first target, without addressing the chronic underlying deficiency of demand, is exactly the error of the 1930s."  There have been two global financial recessions.  We did not use stimulus spending to lift us out of the first, the Great Depression, and over two trillion in stimulus spending has failed to lift us out of the second, the Great Recession.  There is a literature that supports stimulus spending, but it is disputed because many of the models used assume that stimulus spending works and automatically produce big multipliers.  I do not support continued stimulus spending, a strategy that might work, when impending deficits and debt crises, problems that will be made marginally greater through stimulus spending, will lower economic growth and employment for decades if they are not successfully resolved.