Subprime Mortgage Crisis Solutions Debate - Economic Stimulus and Fiscal Policy - Arguments For Stimulus By Spending

Arguments For Stimulus By Spending

Keynesian economics suggests deficit spending by governments to offset declines in consumer spending and business investment can help increase economic activity. Economist Paul Krugman has argued that the U.S. stimulus should be approximately $1.3 trillion over 3 years, even larger than the $800 billion enacted into law by President Barack Obama, or roughly 4% of GDP annually for 2–3 years. Krugman has argued for a strong stimulus to address the risk of another depression and deflation, in which prices, wages, and economic growth spiral downward in a self-reinforcing cycle.

President Obama argued his rationale for ARRA and his spending priorities in his speech of February 25, 2009, to a joint session of Congress. He argued that energy independence, healthcare reform, and education merit significant investment or spending increases.

Economists Alan Blinder and Alan Auerbach both advocated short-term stimulus spending in June 2009 to help ensure the economy does not slip into a deeper recession, but then reinstating fiscal discipline in the medium- to long-term.

Economists debate the relative merit of tax cuts vs. spending increases as economic stimulus. Economists in President Obama's administration have argued that spending on infrastructure such as roads and bridges has a higher impact on GDP and jobs than tax cuts.

Economist Joseph Stiglitz explained that stimulus can be seen as an investment and not just as spending, if used properly: "Wise government investments yield returns far higher than the interest rate the government pays on its debt; in the long run, investments help reduce deficits."

Read more about this topic:  Subprime Mortgage Crisis Solutions Debate, Economic Stimulus and Fiscal Policy

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