Wednesday morning, starting at 10am, I’m on a panel testifying to the Senate Budget Committee about the need for a fiscal stimulus. The other witnesses are Mark Zandi and John Taylor.
I’ll post my written testimony after the hearing. I expect to make three main points in my verbal remarks:
1) We are heading into a serious global recession, caused by and in turn causing a process of global leveraging (i.e., reduction in lending and borrowing). We have never seen this kind of deleveraging – synchronized around the world, fast-moving, and with an unknowable destination.
2) I do not think we can prevent this deleveraging from happening. Nor do I think we should even try to keep asset prices high (or at any particular level). But in the United States we have the ability to mitigate some of the short-run effects and to lay the groundwork for a sustainable, strong recovery. One sensible tool to use in this context is fiscal policy. I lean towards smart spending programs, but as the economy continues to worsen, I think some kind of temporary tax cut could also help – it can potentially have relatively quick effects. (Note: contrary to those who think that if tax cuts are saved by consumers, they are somehow “wasted,” I would point out that anything that improves consumers’ balance sheets is both good for them and for the financial institutions that lend to them.)
3) But there is a real limit to how far we can go with fiscal policy (and with other policy measures). Irresponsible budget policies would not be a good idea – we need to continue a process of fiscal consolidation; it is most vital that people around the world remain confident in the U.S. government’s balance sheet. Some of the highest numbers now being proposed for a fiscal stimulus are probably too high and a mega-stimulus could be counterproductive if it undermines confidence.
I’m proposing a fiscal stimulus of roughly 3% of GDP, to be spent over several years. Given the uncertainties involved, this seems like reasonable middle ground – it’s enough to make a difference, but doesn’t promise a miracle; it can be spent sensibly and at an appropriate speed; and it will not undermine our ability to consolidate the U.S. fiscal position (i.e., bring government debt onto a sustainable path) over the medium-term.