Why Another Stimulus Might Not Help Us Rebuild

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"Stimulus" may be a dirty word in Washington these days, but don't we need another boost to kick-start the economy?

Many economists say yes -- even if it may not be politically feasible after the election. Economic historian Niall Ferguson, however, says a second round isn't a good idea at all.

The Harvard historian tells NPR's Guy Raz that while it might have some impact on unemployment figures, another stimulus also carries with it a tremendous risk.

"The risk is that you finally stretch the credulity of financial markets to the breaking point, and investors -- not only in the U.S., but abroad -- say, 'You know what? U.S. fiscal policy really is out of control,' " Ferguson says.

This Isn't The 1930s

Economists who support another stimulus, many of them "Keynesian" economists, point to Franklin Roosevelt and the results of similar initiatives in the 1930s. During those years, they say, FDR's New Deal helped pull the U.S. out of the Great Depression and kept the nation from crashing on the eve of World War II.

Ferguson says you simply cannot use that era as a blueprint for today.

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"The comparison just suggests a complete historical ignorance on their part," he says. "In the Depression ... the stock market fell 85 percent; the unemployment rate was 25 percent. Right now, the U.S. economy, its gross domestic product is about 2 percent below its pre-crisis peak. The unemployment rate is below 10 percent -- the economy is growing."

Even more importantly, Ferguson points to a fundamental difference between the way the economy functions today and how it did 80 years ago. The market circulated on much more of a closed circuit, within the country's borders.

"Globalization had collapsed by 1932 -- before Roosevelt even came into office -- so it was relatively easy to engage in fiscal or monetary stimulus, because there was virtually no trade, and there was virtually no capital movement across borders," he says.

In today's crisis, Ferguson says, globalization is still operational, and fiscal action in the U.S. has tremendous ripple effects abroad.

"It is no coincidence that the United States has been engaging in massive deficit finance and massive quantitative easing -- to use the technical term for printing money -- and that simultaneously, there have been surges in commodity prices and in emerging markets," he says.

"If the Fed is making dollars available virtually for free to the financial system," Ferguson says, "don't be surprised if people take that money and instead of investing in, I don't know, a new car factory in Michigan, they go and try and invest it in a more profitable way." Like in Asia, Latin America or commodity markets like gold.

Economics For The 'Real World'

So if a second stimulus isn't the best idea, what is?

Ferguson says instead of such short-term fixes, he'd like to see plans for "medium-term fiscal stability."

The first step, he says, is to create a solid plan to balance the budget over a five- to 10-year time frame, which would signal to businesses and investors that it's safe to hire and expand.

"Nobody really wants to invest in any significant way in new plans under conditions of uncertainty, and there's huge policy uncertainty," he says.

Stabilizing the U.S. fiscal position might mean significant spending cuts or significant tax hikes, Ferguson warns. "They're also going to have to stabilize the monetary position, which means probably higher interest rates," he says. "Because of that uncertainty, a lot of businesses are just sitting on their hands."

Additionally, the Obama administration also needs to change its tone, which Ferguson says is currently too anti-business.

"Confidence is a huge part of what makes an economy grow."

As for those economists who disagree with him -- most notably Paul Krugman, with whom he has had public feuds -- Ferguson says they don't really understand the economy.

"I have news for you -- most of the academic economists know fantastically little about the way that the real world works, because they spend a lot of their time doing applied mathematics and devising fancy models that effectively simplify the way the world works, because that sounds really clever," he says.

"What this crisis has revealed is that that cleverness is of very little value in the real world."