What if the Congress decides to slash spending by $60 billion right now? Prominent economists are again disagreeing.
According to Stanford economist John Taylor, we would have a resurgence of business confidence, renewed investment spending and new jobs. Assured that taxes and regulation will not increase, businesses will expand.
On the other hand, economist Mark Zandi (Moody’s Analytics) says that we will lose 700,000 jobs because of spending cuts. He is against “too much too soon.” Referring to “fiscal drag,” economist Alec Phillips (Goldman Sachs) cites the rippling impact of less federal spending that will retard GDP growth.
Who is right?
The Economic Lesson
Looking back and looking forward, the economic debate about fiscal policy is a traditional one. Looking back at stimulus spending since 2008, opponents point out that the stimulus will not only ignite inflation but also was not really necessary. Meanwhile, advocates say we are much better off because of it. Looking forward they differ on how businesses and unemployment will respond.
Also, we should not forget about monetary policy. A similar debate surrounds Dr. Bernanke’s QE2.