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Saturday, June 25, 2011

When has Stimulus Ever Been Politically Feasible?


When has stimulus ever been politically feasible?, by Noahpinion: Brad DeLong says that he and everyone he knows were taken aback by our government's inability to prevent the financial crisis from turning into a protracted recession...
I have to say that I am not surprised by this at all...and I think that even without the benefit of hindsight, I would not have been surprised (and indeed, I always believed that the government's response would be inadequate). Why? Because we've never really implemented effective countercyclical policy in the past!
First, take the Fed's ability to construct its "usual firewall" between finance and the real economy. What usual firewall? Can you name a systemic financial crisis in our history that was not followed by a protracted economic slump? I am not sure I can. ... Maybe the LTCM collapse?
Now take the Fed's inability/refusal to stabilize nominal GDP growth after the crisis. At the zero lower bound, Fed action pretty much means QE. And when have we (or any country) ever implemented large-scale QE in the absence of out-and-out deflation? I can't think of any example.
Finally, let's consider the political feasibility of stimulus. Has the United States ever purposefully enacted a large countercyclical fiscal stimulus in the past? There's the New Deal, but as DeLong himself has mentioned, it was actually pretty small beer. Clinton's 1993 stimulus bill died a quiet death by filibuster. In fact, the only real example of fiscal stimulus that I can think of was Reagan's military buildup...but that was hardly sold as a stimulus.
So history would seem to indicate that the U.S. government is not very good at protecting the economy from financial crises or implementing countercyclical policy in really deep or prolonged slumps. I suspect, therefore, that Brad... was an optimist regarding the U.S. political economy. Sad to say, that is something I have never been.

Here's one answer answer to the question in the title. This type of fiscal policy has been politically feasible.

    Posted by on Saturday, June 25, 2011 at 12:42 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (38)


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