Monday, January 5, 2009

Nothing to see here ...

Buiter has a long post today.  It rambles and staggers (in an interesting way though) to the basic conclusion that the US cannot afford a Keynesian stimulus.  Complementary reading includes Paul Krugman's almost-response, where he admits that he worries about the same things, but puts some numbers to how big a difference various stimulus packages might make.  The answer: not much -- basically, if you think the US is going to default on its debt, it's going to do so regardless of whether we pass a stimulus bill or not.  But first, the question:

Given the bad fiscal position of the US Federal government and given the vulnerability of the external position of the US and its growing reliance on foreign funding, the scope for expansionary fiscal policy in the US is much more limited than president-elect Obama's advisers appear to realise.  Underneath the effective demand problem is a deep structural rot, especially in household sector and financial sector balance sheets.  Keynesian cyclical policy options that would be open to more structurally sound economies should therefore not be tried on anything like the same scale by the US authorities.

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