Here’s something I wrote in January, 2009, about fiscal stimulus:
Before the housing bubble burst, the economy was a size XL shirt. Now it’s size L shirt. The economy is rapidly losing weight so that it can fit into the size L shirt. What this means is closed down factories, canceled construction projects, and massive job loss.
The purpose of fiscal stimulus is to stretch the shirt back out to size XL. This works by replacing consumer borrowing (by way of home equity loans, cash-out refinances, and credit cards) with government borrowing. The idea is that the government will stretch the shirt until the economy grows enough for the shirt to remain size XL without fiscal stimulus.
And my bigger question is this: what if the size L economy is the new normal, and the only thing that will save us in the end is population growth? What then is the proper course of action for the government? If the current crisis is a product of structural change, what’s the best recourse? Replacing consumer borrowing with government borrowing isn’t going to save us if there’s no path back to the size XL economy anytime soon.
Looking at today’s job report, it strikes me that we’re going to be stuck at size L for quite some time.