Brad DeLong explains why Larry Summers thinks the stimulus package is a good idea

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If you’d rather just read the outline version, go to Brad’s blog. But I recommend the video. The size of Brad’s coffee mug is truly impressive, plus he’s actually pretty good at explaining stuff verbally. Which is what professors are supposed to be good at it. Many aren’t.

The main point that DeLong makes on behalf of his long-ago dissertation adviser (that would be former Treasury Secretary and Harvard President Summers) is that you can’t argue that the stimulus plan is bad because (a) it decreases national saving and (b) it won’t accomplish anything. You have to pick one or the other.

People like Willem Buiter, who outlines his views in my previous post, are only making argument (a). The Summers/DeLong refutation of that is that “few things are worse for national saving than a recession.”

I’m not so sure that’s true. The U.S. personal savings rate has been lower over the past three years (0.5% of disposable income in 2005 and 2007, 0.4% in 2006) than at any time since the Great Depression. During the worst recession since the 1930s, that of the early 1980s, the savings rate was in the double digits. Deficit spending by the federal government ate up some of that, but on the whole the nation was still saving a lot by current standards.

The personal savings rate did go negative in the early 1930s. But that means the true statement is probably that “few things are worse for national saving than a depression.” So unless Summers thinks we’re headed for a total economic meltdown, his case isn’t quite as air-tight as DeLong makes it sound.