This is an interesting (a bit long) and thorough analysis by John H. Cochrane of the University of Chicago Booth School of Business discussing fiscal stimulus both in general but more specifically relating to the current situation and how the argument for a general fiscal stimulus (without much of a commentary on the specifics of the Obama team's plan) applies to the credit crisis. Although I would be interested to see a Keynesian's rebuttal to some of Cochrane's points, specifically on the points of the merit of the multiplier argument for fiscal stimulus, he provides some good insight and also a very interesting solution of his own. I specifically liked the points he made at the end of the paper where he points out, "Others say that we should have a fiscal stimulus to “give people confidence,” even if we have neither theory nor evidence that it will work. This impressively paternalistic argument was tried once with the TARP. Nobody could say how it would work in any way that made sense, but it was supposed to be important do to something grand to give people “confidence.” You see how that worked out. Public prayer would work better and cost a lot less." This rang true with something that bothered me with Obama's strategy of rushing a 1000 page long bill through congress. Basically, there may not be anything wrong with what he his proposing, but with so much money at stake, it is worth a closer look to make sure it will do what he says it will do.
Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies?
By John H. Cochrane.
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