Tyler Cowen says

Temporary losses tend to be undone in future periods.  For one thing the Solow model implies catch-up growth, furthermore cyclical losses may exhibit mean-reversion.  There is in the meantime some depreciation of labor skills, from unemployment, but long-run output and welfare really does for the most part depend on the forces which govern economic growth.  (Increases in the variance of consumption are not enough to overturn that emphasis.)

The first part is of course true. If the recession does nothing to alter the pace of technological growth (broadly conceived) then it does very little to alter the welfare of citizens in distant periods.

Where I have to take issue is with the bolded section. I assume Tyler is saying yes some people are hurting especially badly, but concern about long-run productivity trumps that.

Well, as always it depends on the magnitudes and in particular how powerful the policy affect is going to be. In the extreme case imagine that we could totally eliminate all cyclical unemployment in the United States and it would lower the GDP growth path by .0000000001%

Just as a note government policy ought to alter the path of GDP but not its long term rate of growth unless it affects technological accumulation. So we would be talking about shifting society a few minutes into the past in order to eliminate all current cyclical unemployment.

Its hard not to take that. You would really have to have an incredibly low discount rate and not care at all about the fact that people in the future are likely to be much wealthier to begin with to think that deal isn’t worth taking.


On the other hand I see another way Barro’s plan could work. He says

I had a dream that Mr. Obama and Congress enacted this fiscal reform package — triggering a surge in the stock market and a boom in investment and G.D.P. — and that he was re-elected.

which suggests to me he is thinking that by altering the long run desired capital stock we could get a boom in investment that wiped out the GDP output gap. This seems highly unrealistic, though perhaps he has some back of the envelopes on it.

On the other hand if households internalize the long run gains as increases in their stockholdings this could repair balance sheets and allow for an increase in consumer spending, which could in turn promote a general recovery.