By William Dupor, Assistant Vice President and Economist
The Federal Open Market Committee has recently outlined a road map for beginning to raise interest rates, suggesting at least a partial pull back to monetary stimulus. In the past few years, some economists, such as professors Joseph Stiglitz and Peter Diamond, have called on the federal government to stimulate ‘aggregate demand’ through additional government spending.1 Is new fiscal stimulus a good idea?
Only five years ago, the government initiated the $840 billion American Recovery and Reinvestment Act (ARRA) to stimulate the economy. One way to judge whether a new round of fiscal stimulus policy is warranted is to look at how top economists, looking back, assess the ARRA’s impact.
Earlier this year, the Initiative on Global Markets at the University of Chicago asked leading U.S. economists whether or not they agreed with the statement: “Taking into account all of the ARRA’s economic consequences—including the economic costs of raising taxes to pay for the spending, its effects on future spending, and any other likely future effects—the benefits of the stimulus will end up exceeding its costs.”2 Among those who responded, 25 agreed, 10 were uncertain and two disagreed.3 Some commentators read the evidence as strong support for stimulus policies.4
Given the importance of the topic, the survey results merit a closer look. First, the survey respondents were all highly distinguished scholars across a wide variety of subfields of economics, ranging from macroeconomics to game theory to industrial economics.
Given that the question is about the countercyclical fiscal policy as well as the program’s overall impact (rather than the impact of just one particular component of the program), the issue falls squarely in the subfield of macroeconomics. Thus, it is additionally interesting to look at how macroeconomists in particular answered the question.
A recent examination of the webpages and vitas of the survey participants found that of the 37 who answered the question, 13 of the researchers worked extensively in macroeconomics. Among those 13, the answers to the stimulus question were: six uncertain, six agreed and one disagreed. These results suggest that, among macroeconomists, there remains significant uncertainty as to whether the ARRA’s benefits outweighed its costs.
Also, the extent of uncertainty regarding the ARRA may not be thatdifferent from the opinion that many macroeconomists held about fiscal stimulus prior to 2009. In a 2010 interview conducted at the Federal Reserve Bank of Minneapolis, professor Thomas Sargent said: “In early 2009, I recall President Obama as having said that … there was widespread agreement in favor of a big fiscal stimulus among the vast majority of informed economists. His advisers surely knew that was not an accurate description of the full range of professional opinion. President Obama should have been told that there are respectable reasons for doubting that fiscal stimulus packages promote prosperity, and that there are serious economic researchers who remain unconvinced.”5
Along similar lines, in a 2010 article in the Federal Reserve Bank of St. Louis Review on the effects of fighting recessions with fiscal policy, professor Greg Mankiw wrote, “I appreciate that you cannot approach this subject matter without showing some humility about what we, as economists, can truly be confident about.”6
1 Smialek, Jeanna. “Stiglitz Says More Fiscal Stimulus Needed in U.S.: Tom Keene,” Bloomberg, April 9, 2013. “Peter Diamond: We Need Stimulus Now,” The Wall Street Journal, Sept. 27, 2011.
2 This question was preceded by another question about whether the ARRA lowered the unemployment rate relative to what it would have been in absence of the act. The majority answer to this question was also yes.
3 Seven of those surveyed did not answer the question.
4 See, for example, Wolfers, Justin. “What Debate? Economists Agree the Stimulus Lifted the Economy,” New York Times, July 29, 2014.
5 Rolnick, Arthur. “Interview with Thomas Sargent,” Federal Reserve Bank of Minneapolis The Region, September 2010.
6 Mankiw, N. Gregory. “Questions about Fiscal Policy: Implications from the Financial Crisis of 2008-2009,” Federal Reserve Bank of St. Louis Review, May/June 2010.