More on the Stimulus Package

On the phone just now, Larry Summers just moved me appreciably toward enthusiastic support of the stimulus package by arguing, roughly:

• The big arguments against the stimulus package are two:
  • It will become a destructive lobbyist Christmas tree
  • It will increase the deficit and yet fail to stimulate the economy
• We appear to have dodged the bullet on the first argument
• The second argument is incoherent because:
  • The U.S. government is not going to go bankrupt
  • Hence the reason to fear increasing the deficit is the fear that increasing the deficit will reduce national saving
  • But if the stimulus package fails to boost spending, it will be because people save their tax rebate checks, in which case the stimulus will have no effect on national saving. Hence you can believe:
    • Either that the stimulus package will be ineffective as a stimulus but will not reduce national saving--in which case it is a zero.
    • Or that it will be effective as a stimulus--in which case it will be both good for employment and probably good for national saving as well, because few things are worse for national saving than a recession.
    • But the argument that the stimulus package is bad because it will be ineffective at boosting demand and will reduce national savings is not coherent

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