Intersecting Minds: Education, Business and Technology at the North Carolina State Jenkins Graduate School of Management

Another Side of the Stimulus Argument | February 6, 2009

Naked Capitalism is one of my favorite economic blogs out there. Consistent, smart posts that are truly insightful. Here is a great post with a nice dissent against the stimulus. Boiled down, the post features an argument by Willem Buiter that the U.S. has turned into a banana republic, a state lacking all credibility on economic and fiscal affairs. Buiter believes the long-term costs of the stimulus (i.e. hyperinflation and currency collapse) probably outweigh the costs of not enacting it (severe recession).

Money quote on Buiter’s argument:

“Buiter makes a compelling case that lack of credibility has real costs, and uses it to bolster his argument that the US and UK should not go on the kind of whole hog spending spree that most orthodox ecconomists are demanding right now. He thinks a currency collapse, a scenario that most would dismiss as impossible for the dollar, is in fact probable at higher deficit levels in part because creditors and investors know the US and UK lack the discipline to trim the sails soon enough.

While Buiter does not frame it this way, in effect he is saying that the downside of doing too little (deep recession and/or very sluggish growth) is preferable to doing too much (high inflation and the risk of collapses in major currencies.

But the most important aspect of the post is not the policy implications, but the fact that a Serious Economist has finally said that the lack of scruples in America and Britain has gone beyond the tipping point, and is going to exact high societal costs.”

Click here to go straight to Buiters article


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