New Study Highlights Benefits of Expansionary Fiscal Policies in Post-Recession Periods

March 23, 2012
by Doug Gavel

The United States and other nations may recover more quickly following the Great Recession by deploying looser rather than tighter fiscal policies. That is the finding in a new research paper co-authored by Lawrence Summers, Charles W. Eliot University Professor at Harvard University, and J. Bradford DeLong, Professor of Economics at the University of California, Berkeley. The paper, titled "Fiscal Policy in a Depressed Economy" was released Thursday (March 22) at the Spring 2012 Conference on the Brookings Papers on Economic Activity.

With a particular focus on current economic conditions in the United States the authors analyze the impacts of discretionary fiscal policies on spending, growth, revenues, and government debt.

"We argue that, while the conventional wisdom rejecting discretionary fiscal policy is appropriate in normal times, discretionary fiscal policy where there is room to pursue it has a major role to play in the context of severe downturns that take place in the aftermath of financial crises," the authors write.

Summers and DeLong identify several conditions of the current domestic economy -- including high unemployment, lower than ideal rates of productivity, low interest rates, low inflation, and the absence of systemic supply constraints -- which, they argue, make it ripe to benefit from expansionist fiscal policies.

"It is crucial to stress as that this result does not speak to the question of the long run sustainability of fiscal policy, or to the importance of addressing unsustainable fiscal policies," the authors conclude. "Our analysis simply demonstrates that additional fiscal stimulus, maintained during a period when economic circumstances are such that multiplier and hysteresis effects are significant and then removed, will ease rather than exacerbate the government’s long run budget constraint."

Lawrence H. Summers is President Emeritus of Harvard University. He also serves as director of the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School. During the past two decades he has served in a series of senior policy positions, including Vice President of development economics and chief economist of the World Bank, Undersecretary of the Treasury for International Affairs, Director of the National Economic Council for the Obama Administration from 2009 to 2011, and Secretary of the Treasury of the United States, from 1999 to 2001.

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Photograph of professor Lawrence Summers

University Professor Lawrence Summers

Photo Credit: Justin Ide

"Our analysis simply demonstrates that additional fiscal stimulus, maintained during a period when economic circumstances are such that multiplier and hysteresis effects are significant and then removed, will ease rather than exacerbate the government’s long run budget constraint," the authors write.