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Stimulus debates

Henry Farrell on the stimulus debate:

The real debate between Tyler and Paul seems to me to be twofold. One is over the actual effectiveness of Keynesian policy in recessions – where Tyler seems to me to be not entirely opposed in theory, but largely skeptical in practice. I’m not sure that this can be easily resolved given the murkiness of the data (I’m inclined myself to think that demand stimulation works – but only on the balance of probabilities – the evidence seems to me to be strongly suggestive but not compelling). The second is over whether the countries in question are at or around the zero bound, where Keynesian fiscal policy (assuming it does work) is the best tool available. This seems to me to be more fruitful ground for an actual argument – there should be decent empirical indicators that we can use to figure this out.

I've also been meaning to link to Greg Mankiw's National Affairs essay on the difficulty of assessing stimulus. Mankiw's got a conservative bent, of course, but it's a very worthwhile critique.

By Ezra Klein  |  July 23, 2010; 10:25 AM ET
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If you're in the mood for a bit of irony, note that if you go to Mankiw's National Affairs essay, you'll see in the right sidebar a link to a couple of older articles from Public Affairs, one of them from 1991, by David P. Goldman. The first couple of paragraphs of that piece are amusing in light of the 2010 Mankiw piece. The Goldman link (full article) is

Posted by: bdballard | July 23, 2010 10:33 AM | Report abuse

I've come to the conclusion that tax cuts and Keynesian policy are both the right strategy, depending on where you are in the economic cycle. The leading indicator, I suspect, is plant capacity.

When, as it is now, plants are idle (i.e., capacity is low), unemployment is high and inflation is low or stable, applying Keynesian economics should be the order of the day. When plant capacity is high (employmnt rising, inventory building, etc.)and expansion of productive capacity is required, tax reductions on business would be stimulative and provide the capital necessary for growth.

Tax cuts in the current economy don't fit this model and would only lead to a reduction in money supply which would further exascerbate the recession.

Posted by: jehadder | July 23, 2010 11:00 AM | Report abuse

The paper referenced by bdballad above is worth re-reading... particularly when you consider the date of its publication.

Posted by: rmgregory | July 23, 2010 11:35 AM | Report abuse

The best stimulus is the same as it has always been: a Fairer, read Lower, Dollar.

And outside of Wall Street, there is fairly broad support for it now.

Traditional GOP constituencies - manufacturers, resources, agriculture groups - have been speaking out strongly for a Fairer Dollar.

So has the Dems' constituency, Big Labor, with Rich Trumka last week opining that the Yuan is as much as 40 percent undervalued - Yes, he did say that!

And while the Wall Street branch of the Tea Party still wants a so-called "strong dollar," a Fairer Dollar would be very good for the stock market, too, especially the beaten-down commodities, exporter, and manufacturing sectors.

It would pretty quickly translate into gains for consumer discretionary and retail sectors as well, since a higher stock market is among the most important determinants of consumer confidence these days.

Posted by: venerability | July 23, 2010 3:50 PM | Report abuse

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