Monday, October 10, 2011

Can Fiscal Stimulus Work

Scott Sumner has a post on fiscal stimulus he questions the value of it as I do.
Scott questions if based on empirical evidence.  I question it theoretically, how is it supposed to work.    

My problem with understanding how fiscal policy could work is that you are taking just as much money out of the economy by selling t-bills as you are putting in.

Now, I heard one plausible argument for fiscal stimulus. It said that said if Gov announces say a big 10 year road building project a road construction company might borrow money to buy equipment and hire people and that borrowing would be monetarily expansive. I do not think that at any reasonable level could be enough to jump start the economy nor do I see it as good, maybe in the future there will be less borrowing/debt. That IMHO would be a good thing so if monetary policy can get the economy going with less debt that would be doubly good IMHO. Also the gov must at some point pay back the money that it borrows.
It seems to me that monetary policy is far better.

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