Recession of 2009

Objections

Professor Eugene Fama of the University of Chicago argues that consumers do not respond to tax cuts because of awareness that they will eventually be paid for by tax increases (the argument known to economists as Ricardian Equivalence). He also argues that all forms of fiscal stimulus are ineffective because they merely move resources from private investment to government investment or from investment to consumption, with no effect on total current resources in the system or on total employment (the argument known as crowding-out). Others have argued that the danger of incurring unsustainable debt , makes fiscal stimulus a risky option, especially for countries with high levels of national debt. There is also a danger that even relatively modest levels of debt can become unsustainable if investors perceive a risk of default on its repayment, because they would then add to the problem by adding a risk premium to the interest rates needed to finance the debt. Another objection arises from the fear that expansionary fiscal and monetary policies would not be reversed in time to avoid inflation (that objection was expressed by the economist Allan Meltzer in the same issue of the New York Times in which the economist Paul Krugman was advocating a further stimulus in order to avert the danger of deflation ).