Working Papers

Fiscal Stimulus Doesn’t Work - Ever

Tyler Cowen suggests the historical record argues against the effectiveness of fiscal stimulus:

it is very hard to find examples of successful fiscal stimulus driving an economic recovery.  Ever.  This should be a sobering fact…

It’s up to the advocates of the trillion dollar expenditure to come up with the convincing examples of a fiscal-led recovery.  Right now we’re mostly at “It wasn’t really tried.”  And then a mental retreat back into the notion that surely good public sector project opportunities are out there.

So what you have is the possibility of faith—or lack thereof—that our government will spend this money well.

And that is under “emergency” conditions, with great haste (“use it or lose it”), with a Congress eager to flex its muscle, and with more or less one-party rule.

Another way of looking at this issue is to ask why we would ever need to experience a significant economic downturn if policymakers could effectively smooth the business cycle with fiscal policy. 

Meanwhile, Centrebet is offering $1.22 for a local recession by the December quarter 2009.  Assuming an 8% bookie’s margin, this implies a recession probability of around 75%.  Needless to say, the Treasurer is not happy with betting shops speaking truth to power:

I think that sort of talk is utterly irresponsible.


posted on 19 December 2008 by skirchner in Economics, Fiscal Policy

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Assuming an 8% bookie’s margin, this implies a recession probability of around 75%

What’s Bill Evans smoking then?

Mr Evans said the economy was unlikely to contract in 2009, despite falling confidence in business and the possibility of firms delaying investment and hiring.

“At this stage, the leading index is not indicating a recession and Westpac’s forecasts are for a year of weak but nevertheless positive growth,” Mr Evans said.

“However, in the near term, we cannot envisage unexpectedly positive developments in global economic conditions that might allay the concerns of business and financial institutions.”

Unexpectedly positive developments in global economic conditions!?! Is Bill living in some parallel universe where China isn’t crashing?

BTW, regarding the spend vs save discussion earlier, I’m getting the feeling we were both wrong and the punters have gone out and spent more of Kev’s Christmas cheer than either of us expected.

It seems the prospect of higher future tax burdens and losing your job in 2009 have been put to one side for now.

A booze led recovery perhaps?

Posted by .(JavaScript must be enabled to view this email address)  on  12/19  at  11:01 AM

Evans is referring to a year of contraction, not two consecutive quarters of negative growth. It’s quite possible to have the latter without the former. He explained his approach to the definition of recession in his Business Spectator column last week.

Posted by .(JavaScript must be enabled to view this email address)  on  12/19  at  04:00 PM

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