I recently referenced a speech by Christina Romer that discussed the evidence for fiscal stimulus as effective counter cyclical policy -- I am linking to it here.
A quick summary:
-The strongest evidence going for fiscal policy as a stimulative measure revolves around taxes. And military spending.
-There is some evidence that the Recovery Act helped to stabilize the economy, particularly by incorporating omitted variable bias into the analysis. In other words, when looking at the impact, context very much matters.
-We should expect a whole lot of studies in the next few years that will probably draw that conclusion as well.
-Romer comes around at the end to the standard Keynesian talking points. That austerity is the wrong approach in recessionary times and will exacerbate the slide. And, yes, we need to get focused on long-term deficit issues, but not yet -- we are still in the short-term where the emphasis must be economic growth, using the one-two punch of monetary and fiscal stimulus.
It is this last bit that I want to focus in on. My feeling is that the people who push hardest for these courses of action, or some derivative of them, still do not provide a satisfying explanation of why we are where we are. So, if they aren't getting to the cause, how can we expect them to pattern a solution that will really allow the economy to sustainably recover. Therein lies my agita.
But, as a greedy capitalist and investor, it sets up for an easy "contrarian" trade. Not shorting the market per se, but knowing that the only guaranteed outcome from these policies is continued currency debasement. And you know where that leads me.
