Fiscal Stimulus Deniers: John Versus John

John Taylor argues:

The very word “stimulus” has become a dirty word because so many Americans view it as a failure ... At best, there is divided opinion among economists about the stimulus. Indeed, there has always been great deal of disagreement among economists on the efficacy of these temporary “Keynesian” stimulus packages. And during the 1980s and 1990s there was a huge amount of skepticism of their usefulness. How do the new pro-stimulus arguments deal with the fact that there is clear disagreement? Some ignore it and simply assert that there is agreement.

John Taylor’s suggestion that he and John Cochrane agree that the 2009 fiscal stimulus package was doomed to fail misses the point that the two Johns presented incredibly different reasons why they argued that the stimulus was doomed to fail. Taylor’s argument is classic Ando-Modigliani life cycle thinking – give people a permanent tax cut and they consume more of it than they would if it were a one-time rebate. Cochrane was pushing the Ricardian Equivalence line that since the government budget must be balanced in the long-run, tax cuts not financed by eventual spending cuts would have to be later reversed by tax increases. For households not borrowing constrained, such temporary cuts are effectively loans they don’t need and as such would not be consumed at all. Advocates of Ricardian Equivalence such as Robert Barro would argue the same effect would exist if policymakers tried to claim their tax cut was permanent. Let’s put an end to this charade by noting two things. Households facing borrowing constraints do consume tax cuts and transitional increases in government spending – such as the public infrastructure proposals from many economists (including Martin Feldstain) – do increase aggregate demand. OK, John Cochrane seems not to understand this point. Whether John Taylor understands it or not – he is staying silent on this important distinction. But to suggest that John Taylor and John Cochrane have the same views on this topic is disingenuous in the extreme.