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Tuesday, July 02, 2013

'Annoying Anti-Fiscal Stimulus Arguments'

Simon Wren-Lewis:

Annoying Anti-Fiscal Stimulus Arguments Nos. 3 and 4: For numbers 1 and 2, see this post.
Number 3. We must reduce the size of the state.
This argument is often there but unstated, because to say it explicitly involves a deception. ... But as those making the case for austerity get more desperate, I have seen this argument a few times recently.
It involves a deception, because reducing the size of the state has nothing in principle to do with austerity and stimulus. I personally have no strong views about what the size of the state should be: some things are clearly done better by the private sector, while others are done better by the state, and how this eventually pans out for the aggregate I have no idea. But this has almost nothing to do with the need to increase demand when interest rates are at the zero lower bound. ...

The idea that ... temporary [stimulus] is bound to become permanent does not stand up.
4. We must think of the children
This is annoying not because it is wrong in principle. Instead it is wrong because it either ignores who suffers the costs of austerity, or because it is not genuine. The argument that is right in principle is that, by increasing debt, we are ceteris paribus redistributing money from future generations to the current generation. There may be a complete offset if that increase in debt avoids hysteresis effects (or enables investment with beneficial supply side effects). Yet even leaving that aside, there are often very good reasons to redistribute income. When a country suffers a natural disaster, both governments and individuals freely give money to help those involved. We can think about the recession as a similar disaster.
If that does not convince you, ask who is bearing the brunt of this recession. All around the world, youth unemployment has risen by more than unemployment in general. If you asked those who cannot find a job after leaving school or college whether they would be willing to pay higher future taxes in order to get a job today, what do you think their answer would be?

Why do I suspect that this argument is sometimes not genuine? Because some of those who make this case also argue against measures to tackle climate change. Now even if you are sceptical about the science, the potential costs of you being wrong and 98% of scientists being right are so great that if you really cared about future generations you would support measures to reduce carbon emissions. ...

Glad to see point 3 (point 4 too). I've been trying to explain that there is no necessary connection between stabilization policy and the size of government for some time now. This is from 2007, but I first made this point in 2005:

... Want a smaller government? Use tax cuts to stimulate the economy in recessions, and use reductions in government spending to slow the economy when it threatens to overheat and be inflationary. Want a larger government? Do the opposite, increase government spending whenever the economy is lagging, and increase taxes to slow the economy when it begins to overheat.
The point is that stabilization policy - changes in taxes or changes in government spending - does not necessarily change the size of government in any particular direction, that is a policy choice. Traditionally stabilization policy maintains a constant budget balance in the long-run and whether to use tax changes or spending changes is a matter of effectiveness, not a matter of ideology about the size of government. ...

    Posted by on Tuesday, July 2, 2013 at 04:25 PM in Economics, Fiscal Policy, Politics | Permalink  Comments (54)


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