According to Brad DeLong on his blog:
"On the phone just now, Larry Summers just moved me appreciably toward enthusiastic support of the stimulus package by arguing, roughly:
- The big arguments against the stimulus package are two:
- It will become a destructive lobbyist Christmas tree
- It will increase the deficit and yet fail to stimulate the economy
- We appear to have dodged the bullet on the first argument
- The second argument is incoherent because:
- The U.S. government is not going to go bankrupt
- Hence the reason to fear increasing the deficit is the fear that increasing the deficit will reduce national saving
- But if the stimulus package fails to boost spending, it will be because people save their tax rebate checks, in which case the stimulus will have no effect on national saving. Hence you can believe: *Either that the stimulus package will be ineffective as a stimulus but will not reduce national saving--in which case it is a zero.
- Or that it will be effective as a stimulus--in which case it will be both good for employment and probably good for national saving as well, because few things are worse for national saving than a recession.
- But the argument that the stimulus package is bad because it will be ineffective at boosting demand and will reduce national savings is not coherent."
1) The two types of savings effects that he identifies are not symmetric because their time frames are different. If I deposit a $500 check in the bank rather than spending it immediately, feeling $500 wealthier but not immediately buying more things, I may still increase my spending gradually. Suppose the time frame over which the largesse affects me is 5-10 years. The result is next to no economic stimulus, but within a few years $500 less national saving.
2) Writing people checks increases economic distortion because it is in effect a lump sum spending levy that will end up being financed with distortionary taxes. True, the handouts relate to past income tax liability, which depends on past work and savings decisions. But they are handed out after the fact and ostensibly won't be repeated except in unpredictable special circumstances. And while in theory one could finance them with extra lump sum taxes, as a matter of political economy that is unlikely to happen. So we are increasing the likely economic distortion imposed by the fiscal system if we do it without getting effective stimulus.
3) Summers is too glib about the U.S. government not going bankrupt. We are headed towards a huge fiscal policy sustainability problem which can be very disruptive. Default is only the far end of the curve but by no means the only bad part, nor does it differ by more than degree from various politically realistic kinds of implicit default (which in fact could come pretty close to it in their adverse impact on the economy as a whole or various detrimentally relying individuals). Barring effective stimulus, this package makes the problem $145 billion worse. Every little bit hurts.
So there you have it. Law prof or not, I am willing to call out Larry Summers on a matter of basic macroeconomics as well as microeconomic tax policy.