Four criticisms I would have of my own logic are:
- There may be distributional reasons why you would want to change spending,
- An “improvement” in government spending would be beneficial,
- In the face of sticky prices and reference based utility from consumption (that marginal utility from consumption depends on consumption in the previous periods) there could be a role for stabilisation even if the shock is permanent.
- Fiscal policy is better targetted.
My answers to these would be:
- Yes, however that is a separate issue to a general “economic stimulus” – which is the topic I am writing on.
- Yes, however these things would be beneficial outside a recession as well – they aren’t a solution to the crisis they are just good managment policies.
- Yes, fair point – but monetary policy is still appropriate in this case, so why use potential pork barrel politics?
- In realistic terms I think fiscal policy is more likely to suffer from regulatory capture so I don’t agree. However, even if it wasn’t what is the basis to say it is “better targetted” – wouldn’t “targetted” stimulus policy only help to distort relative prices and destroy economic value? Of course, in the face of sticky prices this may not be the case – as the relative prices are already mixed up. In this case there may be a role for government to help drive us back to the right set of prices – however, how the hell do they observe that? I just don’t think it’s practical.
As you can tell – the issue is still well open to debate, so go ahead and criticise me 🙂