New column: Stimulating times

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Forgot to post this Friday. My new column is online and in the issue with BHO in FDR garb on the cover. It begins:

If you had quizzed economists on the topic a decade ago, most would have told you that passing legislation to stimulate the economy was pointless. Getting the timing right was too hard. Increasing the deficit could bring higher interest rates that would stifle growth. Besides, the Federal Reserve, with its legions of smart economists and ability to make quick changes in monetary policy, was in a far better position to battle downturns than Congress was.

Times sure have changed. Fiscal stimulus is Topic A in Washington. Congress is returning for a lame-duck session with plans to pass a spending bill in the $100 billion range. An even bigger effort is likely in January, when Barack Obama moves into the White House. And it’s not just Washington: China has announced a $586 billion stimulus plan, although it’s not clear how much of that will be new spending. Germany has approved $29 billion in spending and tax cuts. British Prime Minister Gordon Brown is expected to announce tax cuts soon.

The simple idea behind all these efforts is that consumers and businesses aren’t spending enough to keep the economy growing; government either needs to tempt them into doing so with tax cuts or do the spending itself. In the U.S., many economists are urging a total stimulus of at least $300 billion, or 2% of GDP. A few say $500 billion or $600 billion makes more sense–and that’s on top of the hundreds of billions already committed to bailing out financial institutions. Goldman Sachs chief U.S. economist Jan Hatzius, who is in the $500 billion camp, estimates that private spending will drop by at least 6% of GDP over the next year or two. To keep that retrenchment from yanking the economy downward into depression, government must step up. Read more.

The San Francisco Fed held a conference on changing attitudes about fiscal stimulus in July. “Rethinking stabilization policy” was the topic of the Kansas City Fed Jackson Hole conference in 2002.