Under the new plan, the government will increase spending on infrastructure to try to boost the nation’s shrinking gross domestic product. In addition, the package provides tax rebates to consumers in an attempt to bolster spending.
Most of the publicly-broadcasted opinion from the economics department has fallen on the conservative side, opposing the stimulus plan on the basis of economic theory.
In a Jan. 22 op-ed in the Wall Street Journal and a later interview with The Atlantic Magazine, economics professor Robert J. Barro attacked the package’s underlying principle that government spending is especially effective in boosting gross domestic product—arguing that tax cuts incentivize people to save, rather than consume or work, and that funneling money into building infrastructure may lead to the construction of “bridges to nowhere.”
Barro’s distrust of government spending as an effective way to counter the recession has been echoed by colleagues such as Economics Professor N. Gregory Mankiw and Martin S. Feldstein ’61, who recently detailed his criticisms in an op-ed in the Washington Post last month entitled, “An $800 Billion Mistake.”
While Professor Philippe Aghion offered a more moderate view of the stimulus plan, he too voiced skepticism of the effectiveness of the tax cut in stimulating consumption.
“There is a concern that if you reduce taxes, people will save,” he said. “Maybe that is what you want to do in the long term, but that is not what you want to do in the short term.”
David I. Laibson, a professor in the department who specializes in behavioral economics, said tax cuts for low-income households will likely be spent in the first year, rather than in the first months after the cut.
Department Chair James H. Stock wrote in an e-mail that empirical evidence suggested that 40 to 60 percent of cuts are spent in a “relatively short period.”
Aghion also said that tax cuts may ameliorate the financial situation of those hit by the recession.
“Macroeconomists cannot ignore the bad externalities of unemployment—like rising poverty and violence,” he said. “This is not just a stimulus package but an insurance package.”
Aghion said that unemployment may be helped through spending on improving infrastructure.
While Barro has argued that directing government expenditures to infrastructure may lead to inefficient, useless projects, Stock wrote that the bill “has infrastructure spending determined by the states directly,” and that decision-making may be more transparent on a state level.