Rescue Helicopters for Stranded Economies

BERKELEY – For countries where nominal interest rates are at or near zero, fiscal stimulus should be a no-brainer. As long as the interest rate at which a government borrows is less than the sum of inflation, labor-force growth, and labor-productivity growth, the amortization cost of extra liabilities will be negative. Meanwhile, the upside of extra spending could be significant. The Keynesian fiscal multiplier for large industrial economies or for coordinated expansions is believed to be roughly two – meaning that an extra dollar of fiscal expansion would boost real GDP by about two dollars.

Some point to the risk that, once the economy recovers and interest rates rise, governments will fail to make the appropriate adjustments to fiscal policy. But this argument is specious. Governments that wish to pursue bad policies will do so no matter what decisions are made today. And to the extent that this risk exists at all, it is offset by the very tangible economic benefits of stimulus: improved labor-force skills, higher business investment, faster business-model development, and new, useful infrastructure.

Aversion to fiscal expansion reflects raw ideology, not pragmatic considerations. Few competent economists have failed to conclude that the United States, Germany, and the United Kingdom have large enough fiscal multipliers, strong enough spillovers of infrastructure, investment, and other demand-boosting programs, and sufficient financial space to make substantially more expansionary policies optimal.