Need for more fiscal stimulus

Many people have drawn false parallels between protectionism and deficit hawks.
Whereas a retreat from protectionism generally causes pain to many people (and calls for a compensating device), a retreat from recession-driven deficits is an unmitigated bad thing for everyone. See piece by knzn in http://economistsview.typepad.com/economistsview/2008/11/deficit-hawks-a.html

There is a desperate need for more widely used fiscal stimulus.

Anti-protectionist policies generally (subject to Paul Krugmans concerns about economies of scale) tend to increase welfare. But such policies often have the effect of generating negative redistributive effects (e.g. trade can hurt some parties that one may wish not to hurt”). These negative effects can outweigh the good (uncompensated) aggregate effects. In such cases, a good argument can be made that losers need to be compensated.

But the argument against Deficit Hawks (those that advocate strong fiscal and monetary intervention to deal with recessions) is conceptually different. In this case, as the author (knzn) points out, the history of capitalism has been a consistent long term trend in increasing welfare. Directly or indirectly, nearly everyone benefits from a large, well-directed fiscal stimulus: the only redistributive effects will be that some people will be less well off than others (they get a lesser share of the additional pie). The deficit amounts to a transfer from relatively rich future generations to todays relatively poor current generation.

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The time has surely come for stronger fiscal action. The other components of the “G20 six-point plan” (further actions to stabilize the financial system, a plan to give liquidity access to emerging and developing nations and the granting of a wider world role to IMF and World Bank) will all take time to institute. Monetary policy has a limited ability to stimulate the economy when we are already in recession.

Without the sixth point – a fiscal stimulus – we are liable to foment a debt-deflation of the type described by Fisher, where debt laden firms and consumers seek to repay loans (so as to avert falling prices) and this hurts demand and leads to further price cuts.

Krugman proposes a huge deficit of the order of $600 billion. In Australia, at the Federal level, we need to promote a second fiscal stimulus, such as additional unemployment benefits and additional infrastructure spending. At the States level, we need to allow the automatic stabilizers to work unhindered. While discretionary spending should be excluded from the state package, infrastructure spending should remain largely unchanged.

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