In his latest note, Nomura economist Richard Koo gives decent marks to Obama’s jobs plan, but says it’s ultimately kind of small, and that when the Tea Party is done hacking it up, it will only be left with fairly ineffective tax cuts.
Given that Koo is such an advocate of fiscal stimulus during a balance sheet recession, this is hardly surprising.
More interesting is where he takes issue with the faction of the pro-stimulus camp, who still ultimately argue that over the long-term we need deficit reduction.
Arguing need for longer-term fiscal consolidation is irresponsible
The insistence that fiscal consolidation is necessary in the longer term is like the doctor who, faced with a patient who has just been admitted to the intensive care ward, repeatedly questions the patient about his ability to afford the treatment. This is both lacking in decency and irresponsible.
If the patient loses heart after learning the cost of the treatment, he may end up spending even longer in the hospital, leading to a larger final bill. Completely ignoring the policy duration effect of fiscal policy and constantly insisting on longer-term fiscal consolidation was what prolonged Japan’s recession.
For instance, it was because Japan’s policymakers refused to give up the medium-term fiscal consolidation target of achieving a primary fiscal balance by 2011 that the government stumbled from fiscal stimulus to fiscal retrenchment and back again and, ultimately, was unable to meet its fiscal targets even once in the last 20 years.
That is why Japan’s recession lasted as long as it did and why the nation’s debt has risen to some 200% of GDP.
Awesome, fresh analysis.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.