Cochrane: Just don't call it "stimulus"!

John Cochrane has a long blog post up, the first half of which is a general discussion of the idea of fiscal stimulus, and the second half of which is a rant about how mean Paul Krugman and Brad DeLong are. I'm going to talk about the first half.

Cochrane writes:

Let's be clear what the "fiscal stimulus" argument is and is not about. 

It is not about the proposition that governments should run deficits in recessions. They should, for simple tax-smoothing, consumption-smoothing, and social-insurance reasons, just as governments should finance wars with debt. That doesn't justify all deficits -- one can still argue that our government used the recession to radically increase permanent spending. But disliking "stimulus" is not the same thing as calling for an annually balanced budget. 

Nor is it about debt financing of "infrastructure" or other genuine investments. If the project is valuable, do it. And recessions, with low interest rates and available workers, are good times to do it. That doesn't justify all "infrastructure" roads and rails to nowhere, of course... 

The "stimulus" proposition is that additional spending -- whether needed or not -- raises output and general welfare.  Pay people $1 to dig ditches and fill them up again, and the whole economy gains $1.5. (emphasis mine)

So Cochrane:

1. Is against austerity during recessions, and

2. Is in favor of increased public investment during recessions.

But countercyclical deficits and countercyclical public investment do not, in his terminology, represent "stimulus"; that term is reserved for the Old Keynesian hole-filling sort of spending. And what does Cochrane think about that sort of stimulus?

Stimulus [is] still an economically interesting proposition, and there is a great deal of uncertainty about whether, when, and how well it might work. There is a huge academic literature being produced right now... 

Here are the facts. Some economic models do predict a fiscal stimulus effect. Some don't...The facts are far from decisive...So, there is a lot of uncertainty and a lot we don't know about how the macroeconomy works. (emphasis mine)

And my response to this is:

!!! o_O !!!   <-- (this is an "emoticon" that indicates surprise)

If I told you that a famous economist thought that austerity is a bad idea in recessions, that recessions are a great time to boost debt-financed infrastructure investment, and that additional Keynesian stimulus spending was an "economically interesting proposition" about which the jury was still out, would you guess that the economist was John Cochrane? Before I read this post, I would not have. But hey, that's cool!

Actually, the parts of Cochrane's post that I quoted above almost perfectly sum up my views on stimulus. Although I'm convinced that recessions are caused by demand shocks, I don't really know enough to firmly believe that burying jars full of money would substantially boost aggregate demand. I don't know enough to accept or reject IS-LM or a New Keynesian model as my working model of the macroeconomy.

But right now, who cares? The fact is, we know we have a huge shortfall of infrastructure spending. Our existing roads and bridges - which clearly do NOT lead to "nowhere" - are falling apart. Even Obama's ARRA "stimulus" did very little to correct the problem. And instead of borrowing more money to fix our crumbling public goods, at a time when borrowing costs are historically low, conservatives are demanding that we tighten our belts and "starve the beast." We are not even close to addressing the question of whether to bury jars full of money.

I think the conservative push for austerity and reduced infrastructure spending is just nuts, and from what Cochrane has written above it seems he would probably agree. If we were to embark right now on a massive debt-financed program of road and bridge repair, that would not meet Cochrane's definition of "stimulus" (thought it would certainly be labeled "stimulus" in the press). It would consist entirely of policies for which Cochrane has expressed unqualified approval.

So why doesn't Cochrane stand up and loudly advocate a massive debt-financed program of road and bridge repair? Is it because the public might get the wrong idea, and start believing in "stimulus" of the hole-filling variety? Is it because infrastructure investment must be politically sacrificed in order to "starve the beast" and fight against creeping socialism? Is it just because Paul Krugman and Brad DeLong are mean mean meanies?

For crying out loud!

I may be wrong, but it seems to me that politics and/or personal feuds have contaminated the public debate over fiscal policy.


Update: Matt Yglesias says I want to "continue the argument" about stimulus. But actually, that's the opposite of what I want! What I want is for people to stop worrying about who is a meanie, and start trying to find as much common ground as they can. If a massive deficit-financed program of road and bridge repair is something that Paul Krugman and John Cochrane can agree on, then I think they should unite and push for that, and if that actually gets done, there will be plenty of time later to argue over whether "stimulus" in the strict sense is a good thing or a bad thing. But right now, it seems like there might be real common ground that is getting obscured by some of the rancor and politics.