"Skepticism, rather than unequivocal opposition, is the right word."

Greg Mankiw with a good post:

"Stimulus Spending Skeptics An AP story reports:

Obama advisers, including Christina Romer and Lawrence Summers, have been contacting economists from across the political spectrum in search of advice as they assemble a spending plan that would meet Obama's goal of preserving or creating 2.5 million jobs over two years....Only one outside economist contacted by Obama aides, Harvard's Greg Mankiw, who served on President Bush's Council of Economic Advisers, voiced skepticism about the need for an economic stimulus, transition officials said.

Skepticism, rather than unequivocal opposition, is the right word ( MAKES SENSE. I AGREE ). When contacted, I said the same things I have been saying on this blog: that monetary policy is not out of ammunition ( TRUE ), and that tax cuts are potentially more potent than spending increases ( IF TARGETED ). I might have added that I feared a spending-based stimulus to address the current short-term crisis might lead to a long-term increase in the size of government, but I doubted that concern would sway Team Obama. In general, I think economists need a large dose of humility when evaluating alternative proposals to deal with the current downturn, as there is still a lot we do not understand( NO KIDDING ).

I am sure I am not the only person in the economics profession skeptical of spending increases to stimulate the economy. See, for example, GMU economist Tyler Cowen. If the new administration wanted to find more skeptics of stimulus spending among professional economists, I could come up with a list of possible candidates for them, but the Obama economists probably already know who those likely skeptics would be.

By the way, House Republican leader John Boehner is compiling "a list of credentialed American economists who would like to add their voices to the list of stimulus spending skeptics." Click here to learn more."

I think skepticism is warranted, but I understand the point of a stimulus, although it certainly is easier to understand in a Saver Country like China. Suppose you want to stimulate spending in an economy of compulsive savers like China. What if you can't? If you give the people money, they'll just keep saving it. If you feel, for whatever reasons, that you need to increase spending, then the government might have to do it.

Now, theoretically, I suppose, in a Spender Nation, if you give people money, then they'll spend it. So, tax breaks might well work. But, you then have the problem that people will possibly save the money. If they do, then the stimulus won't work. Consequently, once you've made the decision to have a stimulus, both in Saver and Spender Countries, having the government spend the money is the only was to make sure that this gets done.

Now, my understanding of Tyler Cowen's views is that he wants to encourage saving now. Consequently, I can't see him accepting any reason for a stimulus. We have to become less of a Spender Nation, and the sooner we start the better.

My own opinion is that this would lead to a feedback loop of Deflation, which, not being our natural mode of functioning, will produce a terrible panic, that will take us years and years to get out of. The most important part of solving a problem is to put it in a form that you can understand and solve. I take a lot of math and science to be just that process of finding the right form in which to solve a problem.

Will a stimulus do anything? Well, first, remember, I don't consider social safety net spending a stimulus, but many do. I believe that we should increase social safety net spending in an economic downturn. Second, some infrastructure spending, which I consider an investment, seems fine. That leaves tax cuts as best I can tell. In other words, I must assume that Mankiw and Cowen don't support the spending on the two categories I mentioned. As for tax cuts, I support targeted tax cuts to help investment, and a sales tax cut or payroll tax cut, in that order. Besides printing money, that's my plan.

Will it work? How the hell do I know?