The Fiscal Cost of Stimulus

Paul Krugman and I posted almost opposite comments on fiscal spending yesterday (his; mine). (Trust me they are not dueling – Nobel Prize winning famous guy, me.) Whereas I was concerned about the long-term cost of higher government spending, he was blasé. From his article, “I’m not proposing a fiscal-stimulus Laffer curve here: it’s probably not true that spending money actually improves the government’s long-run fiscal position (although that’s certainly within the range of possibilities.)” He almost believes that fiscal stimulus (at least under certain conditions) is almost self financing.

I don’t believe it for a minute. But, Krugman’s views are amazingly internally consistent and there is no questioning his mental acuity.

He believes in large multipliers. That is, every dollar increase in government spending increases output by something much larger than a dollar. (He has publically averred to multipliers of around 1.3 but this would not be even in the ball park of self-financing. Spend $1 billion, get $1.3 billion. Spend $1 billion raise $100,000 in extra tax revenue. With our tax system, self-financing begins with multipliers greater than 3.)

If Krugman is correct on the multipliers then he is correct on the cost of the fiscal stimulus. If not, …