Is Fiscal Stimulus Pointless?

The Bogey of Fiscal Stimulus

The Case for Fiscal Stimulus

To be effective, monetary stimulus needs to be accompanied by temporary fiscal stimulus, which is now lacking in all major economies. Indeed, the eurozone, the UK, the US, and Japan are all pursuing varying degrees of fiscal austerity and consolidation.

So he comes over to this country, and he says, We need a big fiscal stimulus.

The right balance today requires creating jobs partly through additional fiscal stimulus aimed at productive infrastructure investment.

Will near zero interest rates, financial sector bailouts, and fiscal stimulus work? What else could be done?

So I really cannot understand Barro s last paragraph The fiscal stimulus package of 2009 was a mistake. It follows that an additional stimulus package in 2010 would be another mistake...

The US does indeed face a long run fiscal deficit, largely the result of rising health care costs and an aging population. But the current fiscal deficit mainly reflects weak tax revenues, owing to slow growth and high unemployment, and temporary stimulus measures that are fading away at a time when aggregate demand remains weak and additional fiscal stimulus is warranted.

But the stimulus that is needed on both sides of the Atlantic is a fiscal stimulus. Monetary policy has proven ineffective, and more of it is unlikely to return the economy to sustainable growth.

Moreover, fiscal support is absent this time QE1 and QE2 helped to prevent a deeper recession and avoid a double dip, respectively, because each was associated with a significant fiscal stimulus. In contrast, QE3 will be associated with a fiscal contraction, possibly even a large fiscal cliff.

US and Chinese leaders have fought the crisis with not only massive fiscal stimulus, but also deep intervention into credit markets. Such extraordinary fiscal largesse, all at taxpayers expense, cannot continue indefinitely.

And for that we need fiscal stimulus ideally, the debt friendly stimulus that raises taxes and expenditures equally. The increased tax burden for all who are employed is analogous to the reduced hours in work sharing.

The brute force of massive monetary and fiscal stimulus rings hollow as a cyclical remedy to this problem. Another approach is needed.

CAMBRIDGE Governments around the world are now developing massive fiscal stimulus packages that will cause unprecedented peacetime budget deficits. The fiscal deficit in the United States this year is likely to exceed 10 of GDP.

Fiscal reform We desperately need you to eliminate the looming fiscal cliff in the context of medium term reforms of both the tax system and entitlements. This would also allow for greater fiscal stimulus at a time when other components of aggregate demand are slowing.

Yes, we were all Keynesians but all too briefly. Fiscal stimulus was replaced by austerity, with predictable and predicted adverse effects on economic performance.

Fiscal stimulus in Europe may still be justified, but structural rigidity will lower its impact on long term growth. Europe s fiscal interventions would be easier to justify if they were accompanied by microeconomic reforms targeted at increasing flexibility.

Unfortunately, the fiscal policy currently adopted by various advanced economies deviates sharply from this path of credible medium term consolidation combined with short term additional stimulus.

The cure, such as it was, finally came about, years behind schedule, not through fiscal bleeding, but by massive monetary stimulus. When the groggy patient eventually staggered to its feet, the champions of fiscal bleeding triumphantly proclaimed that austerity had worked.

LOS ANGELES The debate over fiscal expansion versus consolidation continues to divide the developed world. In response to the global recession of 2008, the United Kingdom embarked on an austerity program while the United States enacted an 800 billion fiscal stimulus.

Even so, some economists still advocate more fiscal stimulus. Instead, Western leaders need to focus on fixing their state budgets in order to salvage what they can.

The Federal Reserve will thus be able to ease monetary policy then to offset the fiscal drag. So Barro is simply wrong when he claims that although the stimulus boosts employment now, amortizing the stimulus must inevitably reduce employment at some point in the future.

Contrary to the current discourse, the long term solution must provide a stimulus to get Europe out of a deflationary vicious circle structural reform alone will not do it. The stimulus must come from the EU, because individual countries will be under strict fiscal discipline.

A vicious circle, it seems, is at work. The way to break it, according to Summers, is to sustain monetary stimulus and boost demand aggressively through fiscal policy.

But, instead of investing, they are building up liquidity. Perhaps a Republican victory will boost their confidence, but in the meantime investment and employment require fiscal stimulus (monetary stimulus, by contrast, would be more likely to stimulate corporations to devour each other than to hire workers).

Greece, which carried out the biggest fiscal stimulus, is the country whose economy has suffered the most damage. Its depression continues, whereas countries like Latvia, Lithuania, and Estonia, which carried out early, radical fiscal adjustments and liberalized their economies, are enjoying strong growth.

The first is transatlantic divergence over how best to assure a return to solid growth. The United States favors continuing economic stimulus, while the European Union prefers fiscal consolidation.

In a serious downturn, a country may wish to pursue a traditional Keynesian policy through large scale, deficit financed fiscal stimulus. Although the Stability and Growth Pact may be elastic enough to permit some deficit stimulus, a country may feel constrained from acting as aggressively as it wants.

The scope for fiscal stimulus is more limited than in 2009, but countries with sufficient fiscal room and available financing should maintain spending levels and preserve critical social and infrastructure programs. Countries with moderate inflation could be more assertive with monetary and exchange rate policy.

The new Obama administration and the Congress are still working out the structure of the fiscal stimulus for the US. Although I support the need for a large fiscal package, I disagree with many of the specific features of the plans now under consideration.

However, since the current growth in the United States benefits from a fiscal stimulus of tax cuts which buy time, the country's economy also attracts close attention of the outside world.

Parlous conditions required dramatic measures. And that is what the economy got in the form of unprecedented fiscal stimulus and unthinkable policy activism on the part of the US Federal Reserve.

When the first arrow of Abenomics a fiscal stimulus program was launched nearly two years ago, asset markets' immediate response was positive. The second arrow of Abenomics monetary easing intensified these effects.

For the global economy, the malaise reflected in anemic trade growth calls for coordinated fiscal stimulus by the world s major economies. Otherwise, the risk of another global recession will continue to rise.

The second arrow entails a sharp increase in short term fiscal expenditure, especially investment in infrastructure projects. While those who, like me, adhere to the Mundell Fleming framework (according to which fiscal stimulus will be offset by the resulting increase in capital inflows, currency appreciation, and reduced export competitiveness) do not stress the impact of flexible fiscal policy, Keynesians take it very seriously.

The fiscal response tax cuts and spending increases has varied considerably, being somewhat more tepid in debt averse Europe than in the US and China. The US is hectoring Europe for more fiscal stimulus, while the Europeans pressure the US for greater and more globally coordinated financial regulation.

First, we must accept that austerity measures, necessary to avoid a fiscal train wreck, have recessionary effects on output. So, if countries in the eurozone s periphery are forced to undertake fiscal austerity, countries able to provide short term stimulus should do so and postpone their own austerity efforts.

Perhaps the most damaging outcome of these tactics is to take countercyclical fiscal policy off the table completely. Regardless of what happens to the global economy in the weeks and months ahead, it is inconceivable that any kind of meaningful fiscal stimulus would get through the House of Representatives.

These are still not normal times, and the vicious cycles persist. Another global fiscal stimulus focused on public investment in infrastructure and education would deliver the adrenaline shot needed for a robust recovery.

As for fiscal policy, Germany continues to resist a much needed stimulus to boost eurozone demand. And Japan seems to be intent on inflicting on itself a second, growth retarding consumption tax increase.

The European public has discovered that the 2008 2009 fiscal stimulus programs, which were aimed at forestalling an even greater crisis, generated more debts than jobs. Politicians, however, hate to confess past errors.

It has already aggressively loosened monetary policy, and it can employ further fiscal stimulus. But policy mismanagement and structural weaknesses in the financial sector and local governments could undermine efforts to safeguard growth.

Partly in response to this fiscal stimulus, the social partners have taken it upon themselves to intervene in businesses and sectors of industry, concluding agreements on employers' contributions to their employees' childcare costs.

To be sure, the fiscal stance improved in many Latin American economies in the years leading up to 2007, so countries like Chile were able to mount a strong anti crisis fiscal response. But, as a 2013 Inter American Development Bank (IADB) report makes clear, the fiscal stimulus was not always withdrawn in time when the crisis abated, so the fiscal position across the region today is weaker than it was in 2007.