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Medicinal Fiscal Stimulus

July 18, 2010

Krugman takes Tyler Cowen to task for describing a bout of government spending after German unification in the early 90s as fiscal stimulus:

I’ll be frank: the discussion of fiscal stimulus this past year and a half has filled me with despair over the state of the economics profession. If you believe stimulus is a bad idea, fine; but surely the least one could have expected is that opponents would listen, even a bit, to what proponents were saying. In particular, the case for stimulus has always been highly conditional. Fiscal stimulus is what you do only if two conditions are satisfied: high unemployment, so that the proximate risk is deflation, not inflation; and monetary policy constrained by the zero lower bound.

That doesn’t sound like a hard point to grasp. Yet again and again, critics point to examples of increased government spending under conditions nothing like that, and claim that these examples somehow prove something.

He then goes on to describe how Jim-Kelly-era Germany’s fiscal situation was nothing like Drew-Brees-era America’s fiscal situation.  Fair enough.  The question lingers, though: even if this was a supply policy rather than a demand policy, high unemployment was not an issue, and Germany could have expanded its money supply, what’s the difference between what Germany did and what Keynesians want to do in our current situation?  If conditions have to be a certain way to merit fiscal stimulus, does that mean that those conditions create the only environment where government spending will work?  Does government spending only stimulate the economy when it’s in the absolute crapper?

It seems weird to argue that the merits of the response don’t matter just because the call is different.  Fertilizing your corn is a good idea regardless of the pace at which it’s growing, but you wouldn’t expect side dressing to produce a different outcome just because you weren’t seeing the growth you’d expected — you’d expect the fertilize to have the same affect on the crops either way.  Krugman appears to be saying that government spending is like medicine: it only works when you’re really sick.  Fine with me, but then the case for government spending during the good times looks pretty weak.

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