Chair Maloney, Vice Chairman Schumer, Ranking Members Brady and Brownback, and members of the Committee, it is an honor and a pleasure to be with you today.

I. Introduction

As the world's economy slowed dramatically over the last few years, an interesting policy revolution took place. Until recently, there was wide consensus among macroeconomists that activist fiscal policy was inadvisable. But in a now prescient piece, Blinder (2004) began a reconsideration of the case against fiscal policy, stating that 'virtually every contemporary discussion of stabilization policy by economists--whether it is abstract or concrete, theoretical or practical--is about monetary policy, not fiscal policy.' Taylor (2009) alludes to a similar consensus, referring to his past work (Taylor 2000), to Feldstein (2002), and to Eichenbaum (1997), who quite pointedly added that, 'there is now widespread agreement that countercyclical discretionary fiscal policy is neither desirable nor politically feasible' (Taylor 2009, p. 2). These reviews generally found that stimulus measures were ineffective in the past, and were usually implemented at the wrong time.

Despite these admonitions, one thing is certain: countercyclical discretionary policy is now politically feasible. Around the world, significant temporary stimulus packages have been implemented. In the United States, government economists have even gone so far as to assert that stimulus actions have the consensus support of economists. In an article in the New York Times earlier this year, Christina Romer, chair of the Council of Economic Advisors, said that 'aggressive, well-designed fiscal stimulus is critical to reversing this severe decline.' The article then continued, 'the vast majority of the nation's economists agree that [fiscal stimulus] is necessary, and soon.'

This generalization did not allude to evidence gathered from a survey of economists. It was merely an assertion. Given that Blinder in 2004 stated the opposite, it raises the question: "what new evidence emerged after 2004 that changed the decades-old consensus in academic literature advising against discretionary stimulus?" The answer, of course, is that there have been no dramatic new scientific breakthroughs. Conclusions concerning the views of the majority of economists should be drawn only after a proper survey. My view is that such a survey would show, as it would in most areas of economics, a significant difference of opinion concerning optimal policy responses to a recession. The basis for this view is presented below.

My testimony will be broken up into four parts. The first will be a brief review of the state of the economy. The second part will discuss the state of the economic literature concerning stimulus plans in general. The third part will discuss a few specifics of the latest stimulus effort. The final section will discuss the merits of alternative policies to those that were enacted this year.

Click here to view the full text of this testimony as an Adobe Acrobat PDF.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.