The visible hand in economics

Dom post article: Time for a fiscal stimulus?

Posted on: November 29, 2008

In today’s Dom Post column we discuss whether a fiscal stimulus is necessary at the moment – our conclusion is that it is not.

Four criticisms I would have of my own logic are:

  1. There may be distributional reasons why you would want to change spending,
  2. An “improvement” in government spending would be beneficial,
  3. In the face of sticky prices and reference based utility from consumption (that marginal utility from consumption depends on consumption in the previous periods) there could be a role for stabilisation even if the shock is permanent.
  4. Fiscal policy is better targetted.

My answers to these would be:

  1. Yes, however that is a separate issue to a general “economic stimulus” – which is the topic I am writing on.
  2. Yes, however these things would be beneficial outside a recession as well – they aren’t a solution to the crisis they are just good managment policies.
  3. Yes, fair point – but monetary policy is still appropriate in this case, so why use potential pork barrel politics?
  4. In realistic terms I think fiscal policy is more likely to suffer from regulatory capture so I don’t agree.  However, even if it wasn’t what is the basis to say it is “better targetted” – wouldn’t “targetted” stimulus policy only help to distort relative prices and destroy economic value?  Of course, in the face of sticky prices this may not be the case – as the relative prices are already mixed up.  In this case there may be a role for government to help drive us back to the right set of prices – however, how the hell do they observe that?  I just don’t think it’s practical.

As you can tell – the issue is still well open to debate, so go ahead and criticise me 🙂

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6 Responses to "Dom post article: Time for a fiscal stimulus?"

For the most part I agree with you Matt. There is probably some benefit in taking advantage of the likely availability of spare labour to accelerate infrastructure projects at lower cost than would previoiusly have been possible. But beyond that it is the job of monetary policy to manage the economic cycle…especially when we still have so much latitude there. Going down the fiscal route makes more sense in those economies where conventional monetary stimulus is all but exhausted and/or credit channels are severely impaired. We are not in that space.

“Going down the fiscal route makes more sense in those economies where conventional monetary stimulus is all but exhausted and/or credit channels are severely impaired. We are not in that space.”

I should have gotten you to write the article 🙂

You are completely right.

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Now for the unpleasant part. ,

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