The world economy | A stimulating notion | Economist.com

"Meanwhile debate has begun on the merits of a fiscal boost well beyond America. The IMF, traditionally a fierce guardian of budget probity, is pushing for broad fiscal loosening if the global economic outlook darkens. Monetary policy may be less effective in this downturn, argues the fund's managing director, Dominique Strauss-Kahn, and many countries are in unusually strong fiscal positions. At the G7 finance ministers' gathering in Tokyo on February 9th, he said that, in addition to America, countries making up a quarter of global GDP had the potential to cut taxes or increase spending—and urged them to begin contingency planning now."

"But many others are sceptical. Jean-Claude Trichet, president of the European Central Bank, has said bluntly that discretionary fiscal policy should be “avoided”. Joaquín Almunia, the European Commission's top man on economic matters, has given warning against “succumbing to the Sirens' songs”. Ken Rogoff, the IMF's former chief economist, says Mr Strauss-Kahn's plan seems “dubious”. A fair few economists within the fund agree."

"But should that option be exercised? Sceptical economists argue that counter-cyclical stimulus often does more harm than good. Politicians traditionally fail to recognise recessions in time, and then take too long to enact stimulus. By the time tax cuts and spending increases arrive, the downturn is often over, and the extra stimulus simply adds inflationary pressure. Moreover, since politicians are usually unwilling to tighten fiscal policy enough in a boom, any loosening of the budget reins tends to result in permanently higher debt. Others argue that temporary stimulus, even if well timed, will not work because people will hardly adjust their spending in response to a one-off tax cut."

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