domingo, 12 de julio de 2009

Marginal thinking about fiscal stimulus

July 11, 2009, 11:04 AM

Marginal thinking about fiscal stimulus

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The figure above is the way economists are taught to think about, well, everything. Greg Mankiw:

Rational People Think at the Margin. A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost.

Yet when it comes to fiscal stimulus, there doesn’t seem to be a lot of marginal thinking going on.

Back in January, the WSJ’s poll of business forecasters found most of them favoring an $800 billion stimulus. The most recent poll finds only a handfulfavoring further stimulus, even though they also see a grim employment outlook for the next year and half. Is this a consistent position?

Well, the marginal benefit of stimulus is that it adds employment and output. This marginal benefit would drop off if you expect the economy to be approaching full employment by the time the stimulus arrives. But few people expect that to happen.

The marginal cost is the way stimulus adds to debt. This cost gradually rise as you add more debt, since the risk of an eventual crisis is increased. But does anyone really think that, say, another $500 billion in borrowing would be the straw that breaks the camel’s back?

The point is that it’s very hard to imagine what would lead you to say that $800 billion in stimulus, which leaves the economy deeply depressed, is just right. You could make a case that no stimulus at all — in fact, fiscal retrenchment — is appropriate. Or you could, like me, call for substantially more. But ratifying what we’ve done, and no more, makes very little sense,

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