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Can the nation stimulate its way to prosperity?

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  • Jason L. Saving

Abstract

The Federal Reserve and Congress responded to the most recent financial crisis with measures to unclog credit channels, shore up the faltering housing market and provide breathing space for large, interconnected financial firms on the verge of collapse. Amid the turmoil came fiscal actions--notably the American Recovery and Reinvestment Act, the fiscal stimulus plan signed into law in February 2009 by President Obama. Passage of the stimulus plan was accompanied by a mix of great expectations and controversy. Christina Romer, incoming head of the Council of Economic Advisers at the time, contended the plan would reduce the unemployment rate 2 percentage points by mid-2010 and create or save 3.65 million jobs by fourth quarter 2010. Others argued that the plan would do far less for the economy and couldn’t be justified at a time of ballooning budget deficits.> These conflicting claims underscore the need to examine fiscal stimulus in a rigorous light to better understand what it can--and can't--accomplish. What is the economic argument for fiscal stimulus? Was it targeted and timely during the most recent crisis, as theory suggests it should be? And what can be said about its costs and benefits thus far? While the overall weight of the evidence suggests the stimulus plan has provided a short-term boost, it's unclear exactly how large this boost has been. What is clear is that stimulus funds have exacerbated near-term fiscal imbalances.

Suggested Citation

  • Jason L. Saving, 2010. "Can the nation stimulate its way to prosperity?," Economic Letter, Federal Reserve Bank of Dallas, vol. 5(aug).
  • Handle: RePEc:fip:feddel:y:2010:i:aug:n:v.5no.8
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