Very Conventional Short-Run Stabilization Policy J. Bradford DeLong University

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Very Conventional Short-RunStabilization Policy

J. Bradford DeLong

University of California at Berkeley and NBERbrad.delong@gmail.comhttp://delong.typepad.com+1 925 708 0467

February 23, 2009Of all the strange things that have happened this winter, perhaps thestrangest has been the emergence of large-scale opposition fromAmerica’s Republican Party to the Obama administration’s plans to try tokeep American unemployment from jumping to 10% or higher. There isno doubt that had John McCain won the presidential election lastNovember a very similar deficit-spending stimulus package—more taxcuts, fewer spending increases—would have moved through the congresswith unanimous Republican support. As N. Gregory Mankiw said of anearlier stimulus package back in 2003 when he was President George W.Bush’s chief economic advisor, this is not rocket science: deficit spendingin a recession “help[s] maintain the aggregate demand for goods andservices. There is nothing novel about this. It is very conventional short-run stabilization policy: You can find it in all of the leading textbooks...”I can understand (though I disagree with) opposition based on a belief that(a) the situation is not that dire, and (b) the government will be slow andwasteful in its spending, while (c) properly targeted tax cuts wouldprovide a more effective stimulus, so (d) it would have been better todefeat the Obama stimulus bill and try again in a couple of months. I can

2understand (though I disagree with) opposition based on the belief that (a)the short-run stimulative effect will be small, while (b) the unstable long-run fiscal position of the United States means that (c) the long-run drag onthe economy from the costs of servicing the debt run up to finance thestimulus package will be large. But I do not understand opposition basedon the claim that the stimulus package simply will not work: that thegovernment will spend its money and the households will receive their taxrebates and that nothing will happen afterwards to boost employment andproduction.Yet there is a surprisingly large current of thought stating that stimuluspackages simply do not work, ever. It is not all coming from politicianscalculating that opposition to whatever is proposed may pay electoralbenefits or, indeed, from any coherent right-wing or indeed left-wingpolitical position. Root-and-branch stimulus opponents whose work hascrossed my desk recently include: efficient-markets fundamentalists likeChicago’s Eugene Fama, Marxisant leftists like CUNY’s David Harvey,right-wing classical economists like Harvard’s Robert Barro, gold bugslike CFR’s Benn Steil, and a host of others. And I do not understand theirargument that government spending cannot boost the economy.Back at the start of 1996, the U.S. unemployment rate was 5.6%. Then theassembled investors and businesses of the United States discovered theinternet. Over the next four years spending on information technologyequipment and software in the United States roared upwards from a paceof $281 to a pace of $446 billion a year—and the U.S. unemployment ratedropped from 5.6% to 4.0% and the economy grew at a 4.3% real annualrate as the spending of the high-tech boom pulled extra workers out of unemployment and into jobs.Back at the start of 2004 America’s banks discovered that they couldborrow money cheaply from Asia and lend it out in higher-yieldingdomestic mortgages while using sophisticated financial engineeringto—they thought, or was it they claimed?—to wall off and strictly controltheir risks while making lots of money. Over the next two years spendingbuilding residential structures in the American economy roared upward

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