unwise.”
The fact that interest rates were at a historically low level and expected to remain so for
many years even at the time he was writing last summer led Elmendorf to the following conclusion,
which is even more true now:
Federal borrowing is thus less costly and creates less risk for the federal government than
many of us predicted several years ago — and, according to economic analyses, does less
harm to the economy even in the long run. In addition, the funds used as stimulus do not
disappear: They support government spending for public goods and services, or they lower
taxes so that households have more resources for their private activities.
In sum, we have plenty of capacity in the federal budget to undertake vigorous
countercyclical tax and spending policies when the next recession arrives. Given the economic
and social costs of recessions, we should undertake such policies (emphasis added).
4. Sustained fiscal expansion could be necessary. The low-interest-rate environment and the
experience with sluggish recoveries from the Great Recession and the milder recessions in 1990-
1991 and 2001 lead to the fourth principle in the new view of fiscal policy: it may be desirable to
pursue sustained fiscal expansion.
Before the Great Recession, economists who were sympathetic to fiscal stimulus in principle were
hesitant to recommend it in practice due to concerns that delays in recognizing the need and
enacting the necessary legislation would delay the stimulus from taking effect until monetary
stimulus had already kicked in and the economy was recovering at a reasonable pace. That could
potentially be destabilizing and lead the Fed to raise interest rates to prevent overheating, largely
offsetting the stimulus. The net result would simply be an unnecessary increase in debt to finance
stimulus that was no longer needed and the Fed had largely offset.
In today’s low-interest-rate global economy, however, the case for more sustained stimulus in the
face of deficient aggregate demand is much stronger, especially if the stimulus takes the form of
productive investment.
The Great Recession wreaked long-lasting damage on the economy’s
productive capacity, as a result of the sharp contraction in productive investment and the effects of
long-term unemployment on workers’ skills, employment prospects, labor force participation, and
earnings, as described earlier. Stronger and more sustained fiscal stimulus could have attenuated
these effects substantially. Avoiding additional damage due to COVID-19 is now essential.
Douglas Elmendorf, “Yes, we still have the fiscal capacity to deal with a recession,” Washington Post, September 3,
2019, https://www.washingtonpost.com/opinions/yes-we-still-have-the-fiscal-capacity-to-deal-with-a-
recession/2019/09/03/2f5081b4-c8f0-11e9-a4f3-c081a126de70_story.html.
Brad DeLong, Larry Summers, and Laurence Ball, “Fiscal Policy and Full Employment,” Center on Budget and Policy
Priorities, April 2, 2014, https://www.cbpp.org/sites/default/files/atoms/files/4-2-14fe-delong.pdf.
See Heather Boushey, Washington Center for Equitable Growth; Robert Greenstein, Center on Budget and Policy
Priorities; Neera Tanden, Center for American Progress; and Felicia Wong, Roosevelt Institute, “Commentary: Deficit
and Debt Shouldn’t Factor Into Coronavirus Recession Response,” March 19, 2020,
https://www.cbpp.org/research/economy/commentary-deficit-and-debt-shouldnt-factor-into-coronavirus-recession-
response: “We face a once-in-a-generation — hopefully once-in-a-lifetime — crisis, with the risk of tens of millions of
infections and mounting numbers of deaths, an overwhelmed hospital system that can’t respond adequately, large
numbers of businesses closing or cutting back, millions of workers losing their jobs or having their hours slashed, and