Does the Economy Need a Fiscal Stimulus

Larry Summers, former Treasury Secretary in the Clinton administration, is making the argument that in order to prevent a recession, the President should implement a short-term fiscal stimulus to compliment whatever help the Fed can give by lowering the Federal Funds Rate. I have a lot of respect for Summers as an economist, in spite of the fact that he is a Democrat. Instead of lifting a few excerpts from Summer's article, I would rather just suggest that you click over and read the whole thing. He makes a compelling argument and it is certainly something that should be considered.

If the past is any predictor of the future, then Summers has a good case. The Fed certainly did their part, under Alan Greenspan, to soften the landing that occurred as the economy began to slow in 2000. Also the Bush administration did their part in 2001 with a short-term fiscal stimulus. In hindsight, I don't know how effective the fiscal stimulus was in reducing the impact of the inevitable downturn. What it certainly did though, and what fiscal policy often only does, is make people feel better. But making people feel better is certainly not a trivial thing. Economics is nothing but a study of human behavior, and nothing else affects human behavior as negatively as fear. Summers' argument that a fiscal stimulus would ease pressure on the Fed to cut the Federal Funds Rate too low, thus easing inflation and weak dollar worries, is a viable one.

A recession is defined as two consecutive quarters of negative economic growth. I believe that there may be some slow growth in our future, perhaps one per cent or even less, but I personally think that this economy is too strong to go into a serious slump. But would a fiscal stimulus hurt anything? I doubt it, and for that reason I wouldn't oppose it. It may not do any real good, but it certainly couldn't do any real harm. As for the politics of it, well thats the easy part.