Jan 28, 2009


In his NY Times blog Paul Krugman attacks my piece on the stimulus plan.

Again, here is my argument in three sentences.

1. Bailouts and stimulus plans must be financed.

2. If the financing takes the form of additional government debt, the added debt displaces other uses of the same funds.

3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.

Are any of these statements incorrect?

In his attack on me Krugman implicitly assumes that sentence 3 above is true; that is, the stimulus plan will on balance move resources from less productive to more productive uses. This is indeed the focus of the issue. But the answer with respect to an $825 billion stimulus plan (whose details will be subject to lots of political pressures) is more than a little debatable.

Here are two interesting links on the stimulus that come to conclusions similar to mine.

From Robert Barro, "Government Spending Is No Free Lunch."

From John Cochrane, "Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies?"

Eugene F. Fama
The Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business
Kenneth R. French
The Roth Family Distinguished Professor of Finance at the Tuck School of Business at Dartmouth College
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Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to Dimensional Fund Advisors LP.