Nobel Prize-winning economist Robert Mundell suggested three years ago that the government should stimulate the economy with $500 billion in short-term spending vouchers, but he’s recommended more recently that officials focus on permanent tax rate cuts.
Now Mundell tells Bloomberg Businessweek that fiscal stimulus may be a relic of a bygone era of smaller government.
Can we have confidence in a near-term stimulus in the U.S. or do we need to match that with long-term fiscal responsibility?
Well, I think you could have fiscal stimulus back in the days of Keynes, when the government was a small proportion of GDP and there was no insolvency problem. But now the United States, though it’s not in as bad a situation as Europe, is getting that way, and you can’t just issue more bonds to pay for deficits and expect that to solve the employment problem. Back in the 1960s, if you look at Europe, government spending as a share of GDP was about 25 percent. Now it’s double that. That’s beyond equilibrium.