The world economy has had a heart attack; the heart and arteries are the financial sector (Caballero 2009). Ambulance economics is about the immediate, urgent, but temporary rescue process in the form of fiscal stimulus policies. The aim is to prevent the recession that resulted from financial panic and a possible breakdown of the monetary system from turning into another Great Depression. Provisionally it seems that, thanks to the worldwide use of the Keynesian ambulance, a Great Depression has indeed been avoided.
But there are many costs and benefits to be considered. In particular, one must weigh the adverse effects of the increased public debt that results from short-term stimulus policies against a number of benefits obtained in the post-crisis period. Above all, it is important to keep in mind the correct counter-factual. In the absence of fiscal stimuli, there would be a much greater irretrievable loss of output in the crisis period.
CEPR Policy Insight No. 43 on “ambulance economics” discusses all these issues in more detail. It is a think piece about the pros and cons of fiscal stimuli. It reviews practical aspects of fiscal stimulus policies, noting especially the inevitable trade offs that are involved. It discusses the relationship between a long-term public debt problem caused usually by demographic factors and the need for short-term fiscal stimulus for Keynesian reasons. Also, it analyses critically seven common arguments against fiscal stimuli.
ReferencesCorden, Max (2010), Ambulance economics: The pros and cons of fiscal stimuli, CEPR Policy Insight 43
Caballero, Ricardo (2009), “Sudden financial arrest”, VoxEU.org, 17 November.