Q&A: Economist David Ross on the Fiscal Stimulus

Posted January 31st, 2008 at 6:23 pm.

photo: David RossOn Tuesday, Congress passed a $146 billion fiscal-stimulus package that will include tax rebates for millions of taxpayers. Will it really boost the ailing economy? Associate Professor of Economics David Ross, the coauthor of the leading textbook in industrial organization, offers his opinions on the stimulus package, taxation and the use of fiscal policy to steer the economy.

Is the $146 billion fiscal-stimulus package that was approved by the House of Representatives on Tuesday a good idea and will it help the economy?

A stimulus package along the lines discussed is a good idea so long as it stays focused on increasing take-home pay for the middle class and working poor (the folks likely to spend it). The danger is that our politicians will allow the bill to be larded with spending programs or special tax cuts that will have little immediate effect, while ballooning the deficit for years to come.

Will it be enough to keep the U.S. economy from slipping into recession?

According to the classic definition of a recession—two consecutive quarters of falling national income—we’re not there yet and it’s not even clear that left to just bumble along the economy would enter a recession. But failing to act would cause the economy to underperform relative to the growth of the 1990s or the first half of this decade. Definitions notwithstanding, there are certain sectors of the economy—like housing and various import-sensitive industries—that are clearly experiencing the full effects of a recession right now.

What’s really wrong with the economy and does the plan address those problems?
There are a bunch of structural problems that need to be addressed, but I can’t see that happening until after the election. At the top of my list I’d put a generation of politicians who have told wealthy Americans they are overtaxed—and that there are no consequences to further tax cuts; the looming deficit in Medicare; the lack of portability in health insurance across jobs; and inadequate mechanisms for sharing the benefits of international trade and technological innovations with families that are injured by these transformations.

Is there any silver lining to the current economic downturn?One good thing about this scare is that it has broken the political logjam on using fiscal policy to steer the economy. Monetary policy certainly is a powerful tool, but the ability to use it to steer the macroeconomy (which generally happens with a substantial lag) is complicated by its much shorter-term effects on international financial flows and on the domestic financial markets. Fiscal policy for the last eight years has been held hostage by the unconscionable deficits created by the Bush tax cuts and the failure of the Congress to pay the bills for Iraq and Afghanistan.

At Bryn Mawr since 1992, David Ross is coauthor of the leading textbook in industrial organization and specializes in public policies toward imperfectly competitive industries and the impact of technological change on economic performance.

An applied econometrician, Ross has studied the determinants and consequences of educational attainment in developing countries. In addition to his academic career, he has served as a staff economist with the Antitrust Division of the Department of Justice.

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