WSJ–economists on stimulus

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Mainstream economics is largely a disgrace

Economists Give Fiscal Stimulus Mixed Grades

Jon Hilsenrath

August 22 (WSJ) — Economists at the Federal Reserve’s Jackson Hole Symposium in Wyoming gave the Obama administration’s fiscal-stimulus program a mixed review, saying it wasn’t as well targeted as it could have been and pointing to the challenges of balancing stimulus against long-term deficit worries.

In a paper being presented Saturday at the conference, Alan Auerbach of the University of California at Berkeley and William Gale of the Brookings Institution noted problems the U.S. had in the 1930s and Japan had in its 1990s “Lost Decade” making fiscal policy work.

“The remarkable fact is that sustained fiscal policy expansion was not attempted in either episode,” the economists wrote, in part because policy makers were focused on balancing budgets even as they tried to pump money into the economy.

The U.S. government, for instance, raised taxes in 1932, as did state governments, and a round of fiscal restraint hit in 1936 and 1937. “By the end of the decade, even with output well below potential and the unemployment rate at 17%, the contribution of fiscal policy to aggregate demand in 1939 was 0.6 percentage points larger than in 1929,” they note. In Japan, spending was often offset by tax increases, in part due to concerns about the fiscal outlook.

They spend less time detailing their specific criticisms of the 2009 stimulus plan, but offer up several critiques: tax cuts will stimulate demand but could have been designed better, they say. Research has shown that lower-income, liquidity-constrained households have a higher tendency to consume after getting tax cuts than higher income households, but the authors don’t detail how the program could have been pointed more in their direction. Moreover, the authors write, spending wasn’t well-targeted. “Government investments were part of a longer-term Obama agenda and are probably not best characterized solely as stimulus,” they say.