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No new stimulus bill?

Budget expert Stan Collender predicts that there will be no new stimulus bill this year, despite politicians' anxiety about being blamed by voters for the continuing economic slowdown, on the very shrewd ground that pursuing further fiscal stimulus might not quite make sense right now either for the Republicans or the Democrats.

I must confess that this is a relief to me (assuming Stan is right), even though I recognize that the macro-economy is continuing to sputter badly. If we generalize the question from whether well-done stimulus might make sense today to that of whether a political rule in favor of doing it is efficacious on balance, I think the better view remains, pretty clearly, no. This was indeed the consensus of the political and policymaking world until it was reversed by Bill Clinton in the 1992 election ("It's the economy, stupid."). After that, no one on either side of the aisle wanted to risk being cast in the public role that George H.W. Bush ended up playing in the 1992 drama. But to me, the fact that Clinton revised the optimal political calculation does not mean that he revised the optimal policymaking calculation, as indeed we saw anew when George W. Bush misleadingly cast the 2003 tax cuts as fiscal stimulus.

Let the Fed handle it, I say, not because it necessarily can, and not because better-functioning political branches of government couldn't chip in as well through counter-cyclical fiscal policy, but because, as Donald Rumsfeld might have put it, we can only go into battle with the political branches that we actually have.

Full post as published by Start Making Sense on July 21, 2008 (boomark / email).