Paper – Fiscal Policy in a Depressed Economy

by Sabrina I. Pacifici on April 2, 2012

Fiscal Policy Pays for Itself, Stimulus was the Right Call – Unusual Times Call for Unusual Measures – Stimulus Should be Used Again Now

  • “With monetary policy out of ammunition, policymakers should aggressively turn to fiscal policy, which may do so much good for the economy that it virtually pays for itself, according to a new paper released today at the Spring 2012 Conference on the Brookings Papers on Economic Activity (BPEA) authored by Lawrence Summers of Harvard and J. Bradford DeLong of U.C. Berkeley. In Fiscal Policy in a Depressed Economy, Summers, who served as one of President Obama’s top economic advisers and was Treasury Secretary under President Clinton, and DeLong argue that we are living in unusual economic times, which call for unusual measures. They say that “while the conventional wisdom rejecting discretionary fiscal policy is appropriate in normal times, discretionary fiscal policy where there is room to pursue it has a major role to play in the context of severe downturns that take place in the aftermath of financial crises.” They note that with the current low U.S. Treasury borrowing rates, and with the monetary policy offset that damps the multiplier in normal economic times, “right now the U.S. Treasury possesses the exorbitant privilege of borrowing cheaply by issuing a safe asset in great worldwide demand. This feature of the economy would have to be not just negated but strongly reversed for the benefit-cost test to fail.”
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