The cost of the stimulus

There's been a lot of talk about how much the stimulus will add to the national debt, and how much it will cost the economy in the long run. It reminds me of something I read once in an old textbook. Who actually paid for WWII? Was it those of us who paid taxes to service the national debt in the succeeding decades? Well, if you really believe in the concept of opportunity cost, the war was paid for by the people at the time who did without cream for their coffee, gas and rubber for their cars (and new cars), nylon for their stockings, and so on. Did the war crowd out private investment that would have contributed to growth later on? Not really. The government built new plants that were given to private companies (e.g. Alcoa), and the twenty-year postwar boom is hardly evidence of crowding out during the war.

And what will be the opportunity cost of the current stimulus plan? If it works the way it should, nothing. The resources to be used would have been idle anyway. More investment is likely to be crowded in than crowded out—construction companies buying new cranes to work on those highways and schools. It's not like interest rates are going to go up much. The deficit might even be smaller than it would have been with a full-blown depression. If we pay for the extra spending by printing money that will be discreetly drained away later, or by selling government bonds with rock-bottom interest rates, there won't even be much effect on the nominal national debt. So I wish everybody would just quit worrying so much. If there's any case against the stimulus, it has to be about all the non-stimulating things that are in there, like AMT relief. But that's just political horse-trading.

The important thing is that fiscal policy and monetary policy are working together for once. When they don't, we have disasters. In this case, the fiscal stimulus to aggregate demand has to run parallel to the repair of the financial markets and aggressive monetary ease. One without the other won't do much good.