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In a recent post, my colleague Casey Mulligan, who has been a critic of federal stimulus spending, made an important point about that spending – whether it is stimulative or not depends vitally on its composition.
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"Will it be stimulative?" Mr. McKelvey said.
It's stimulative for an economy that has recession written in capital letters.
The point was that some federal spending is stimulative by definition.
A way out of that bind is stimulative fiscal policy, but Congress is gridlocked.
One argument, popular in Europe, is that fiscal consolidation is stimulative by reducing uncertainty, the fear of future tax increases and inflationary expectations.
Right now monetary policy is loose, fiscal policy is stimulative, and cash reserves are building up in the system," he says.
This process is stimulative in the short run more debt for less cost but is clearly dangerous in the longer term.
The government's addition to ongoing spending would raise inflation, however; it would be stimulative because there would be even more money chasing a given set of real resources.
"It may be long before the tolls become remunerative, but its immediate effect on commerce will be stimulative," it said.
Monetary authorities could engineer a similar recovery today by committing to a 5% rate of nominal GDP growth, which implies inflation of 2% or more.And Greg Mankiw has pointed out that a commitment to higher inflation would encourage households and businesses to spend money now, which would be stimulative, rather than hoard it.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com