Monday, July 19, 2010

Summers: More Fiscal Stimulus Now, Reduce Deficits when economy has recovered

by Bill McBride on 7/19/2010 01:17:00 PM

Lawrence Summers writes in the Financial Times: America’s sensible stance on recovery

[W]here an economy’s level of output is constrained by demand and the central bank has at best a limited ability to relax that constraint because it cannot reduce interest rates to below zero, fiscal policy can have a significant impact on output and employment.

...[and] there is a very strong presumption that there are likely to be beneficial effects from the expectation that budget deficits will be reduced after an economy has recovered and is no longer demand-constrained.
In most of the industrialised world, given that economies are in or near liquidity trap conditions, it is [these] propositions that should control policy. Together they make a case for fiscal actions that maintain or increase demand in the short run while reassuring markets on sustainability over the medium term.
It looks like the only additional stimulus will be an extension of the emergency unemployment benefits - and even that isn't clear.