I hope you noted that the blog post and newspaper article I linked to and quoted did question that point.
Personally I think there is something of a stimulus effect from governments running deficits. But that fact doesn't mean they always, or perhaps even normally should try for a fiscal stimulus in bad economic times. The stimulus effect is IMO normally smaller, often much smaller, then the supporters of fiscal stimulus represent it as being. When the government spends money, it has to either tax it or borrow it (pulling money out of the economy as it puts it in), or "print" it (creating future inflation, and of present reactions to the risk of future inflation that can act against the stimulus effect).
Also if we start out with a lot of debt, and with a deficit even before the attempt at stimulus or even the down turn, the resultant fiscal problems reduces confidence and has a negative effect. And the bigger government brought on by attempts at stimulus is negative for long term growth.
Even if you don't start off with deficits and a large debt, so fiscal problems aren't really an issue, and if the stimulus is tax cuts or truly temporary programs so it doesn't create a larger government going forward, its still likely to be weaker than claimed, and also its hard to time correctly. The president and congress have to have the right idea about when to do it, then they have to get it passed, then it has to go in to effect, and then there is an additional lag in getting any possible benefit. By the time you get a (relatively small) stimulus effect the economy has often left the recession, and sometimes even started robust growth, so the stimulus money becomes pro-cyclical rather than counter cyclical, meaning you cause harm rather than benefit in terms of reducing the swings of the economy (and reducing the volatility is the only real reason for stimulus, it clearly doesn't increase long term growth).
Add to all of that you have the fact that fiscal stimulus has a tendency to be set up so as to try to prop up companies or economic activity that isn't working well, so it can slow down adjustment that could lead to more robust growth going forward. |
