 "The stimulus should be monetary, not fiscal")
Several economists have recently argued for increasing public expenditure, through deficit financing, to address the current growth slowdown. This argument rests on the premise that increased government spending would enhance purchasing power in the hands of consumers and firms and, thereby, increase aggregate demand to bolster growth.
I want to unpack the analytics of this argument. For those who consider the current slowdown to be “cyclical” (I don’t), this is an obvious textbook prescription — spend more during downturns, less during upturns.
This argument is misplaced. First, public spending has, in fact, been expansionary over the past few years. While
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