Jonathan Chait

When Conservatives Loved Keynes

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While researching an item from earlier this morning -- yes, I do research, I just try to avoid talking to people -- I came across a fascinating exchange about the concept of economic stimulus. In 2001, the economy was undergoing a mild slowdown. Liberals generally argued that the scale of the problem was small enough for the Federal Reserve to handle with monetary policy, and didn't require a Keynesian fiscal stimulus. Conservatives took the opposite position. Here's a great exchange at a 2001 hearing in Congress between Paul Ryan, AEI economist Kevin Hassett, and Bob Greenstein of the Center on Budget and Policy Priorities:

Mr. GREENSTEIN. If I could just comment on it. As I have said before, I think the economic benefits are being overstated. The economy has slowed right now. I don't see how, particularly given the pace of the Senate, the checks are going to go out much before next summer. The CBO forecast you are operating on shows that by 2002 we have a full scale recovery from the recession.

I think we do have a problem right now, and our best mechanism right now is interest rates. I hope the Federal Reserve lowers them further. I think that is going to have a much bigger effect than anything you do on taxes because I don't think -- it is not that tax policy can't have a stimulative effect. It is very unlikely even this year to occur in time to make much difference.

Dr. HASSETT. I would just like to add, Mr. Ryan, that the economists who studied this were quite surprised to find that fiscal policy in recessions was reasonably effective. It is just that folks tried  a first punch that was too light and that generally we didn't get big measures until well into the recession. So the reason that in the past fiscal policy hasn't pushed us out of recession is that we delayed.

So I think that Mr. Greenstein agrees, and he is saying it is not likely that we would pass it soon but I would argue this is why we should.

Mr. RYAN. That is precisely my point. That is why I like my porridge hot. I think we ought to have this income tax cut fast, deeper, retroactive to January 1st, to make sure we get a good punch into the economy, juice the economy to make sure that we can avoid a hard landing.

The concern I have around here is that everybody is talking about let's wait and see, let's see if they materialize. Well, $1.5 trillion have already materialized in the surplus since then-Governor Bush proposed this tax cut in the first place. The economy has soured. The growth of the projections of the surpluses are higher. So we have waited and we do see, and it is my concern that if we keep waiting and seeing we won't give the economy the boost it needs right now.

Greenstein is taking the sensible position that the 2001 recession seems mild enough that Keynesian tax cuts will not be needed -- by the time their stimulative effect kicks in, the economy should be growing again. Hassett, the conservative, replies that Keynesian fiscal policy during recessions works, and the only problem is that it's usually too small. And Ryan agrees!

Ryan and Hassett, of course, fiercely opposed the concept of fiscal stimulus in 2009. I don't see how you can explain progressing from that position to opposing Keynesian stimulus during a severe liquidity trap, the worst economic crisis since the depression, except as a function of pure partisanship.

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