Earlier today I wrote an article that I simply had to take off of the web. I recoiled when I read this article by Martin Wolf that led me to this article at the Financial Times. Congress is certainly going to mess this up.
Originally, I stated that the government should spend (as it is surely going to do) rather than cut taxes because consumers saving is rising and the marginal propensity to consume is falling. Simple Keynesian multipliers suggest that a spending stimulus would insure the biggest bang for the taxpayer’s buck.
I apologize – that post made me very uncomfortable and I had to take it off the net because I simply don’t trust Congress not to overdo it.
To be sure, Bernanke cannot do it alone. When the central bank faces a liquidity trap – like the U.S. Fed is facing right now – fiscal policy is the country’s best hope for a government-bought expansion. But how much should the bill cost taxpayers?
On October 15, Democratic leaders said $300 billion
On December 1, Pelosi says $500 billion
And today, I find an article from the Financial Times, dated on November 24, that the fiscal package could cost anywhere between $500 billion and $1,000 billion (why don’t they just say $1 trillion?).
One has to wonder if policy makers really have a clue what they are proposing. When exactly did we move away from a world of $billions to a world of $trillions?
The budget deficit is already estimated to reach $1 trillion (yes, $1,000,000,000,000) in 2009, and that doesn’t include the $300 billion, no $500 billion, no $1 trillion stimulus plan.
Yes, a fiscal stimulus is needed. This recession has got some teeth on it, and since the banking sector is hoarding cash, monetary policy is impotent. But when is it simply too much? I guess that a counterfactual is in order, but I just don't have one besides the Great Depression. I suspect, though, that Congress is going to overdo it.