I have yet to see what I would consider to be a persuasive argument in favor of this belief.
Bruce Wilder (see his response to my earlier post) suggests that most economists do not believe that this is true universally; but that it is true only under "special" circumstances like a large negative "aggregate demand" shock. According to Bruce:
The case for fiscal stimulus rests on the belief that macroeconomic circumstances are such that the economy is not near, and is not headed in the near-term toward, a full-employment equilibrium, and that the price matrix is seriously out-of-whack.
I think that his view reflects accurately how many economists feel about why a massive fiscal stimulus is currently needed. The question I have for non-believers is the following: Do you find Bruce's argument persuasive?
Personally, I do not. He makes no attempt to justify his belief that the price-system is seriously out-of-whack. And even if it is out-of-whack, he makes no attempt to explain to us why this is the product of market malfunctioning, rather than government regulation. Moreover, he does not tell us what "the full-employment" level of employment is in the U.S. Nor does he identify other episodes in economic history where the policy has worked under similar "special" circumstances. No...instead we are asked simply to believe. Indeed, the non-believers are asked to explain why they do not believe!
I have stated earlier that I believe that fiscal stimulus can "work" as a redistributive mechanism. The only semi-clear evidence I see where fiscal policy has "worked" to stimulate aggregate output and employment is in the U.S. during WW2. But this policy was also associated with a significant decline in private consumption. In short, people were willing to make sacrifices to support the war effort. A similar policy today would not likely be viewed as welfare-enhancing by a population not currently facing a large threat to national security.
Where else can we find examples of economies subject to Bruce's special "deflationary" shock? How about Japan? Why did Bruce not mention the "success" that Japan has had in overcoming its troubles with fiscal stimulus. Let me explain to you why. Because the evidence clearly does not support the hypothesis; see my earlier post here. (Actually, if memory serves, perhaps Bruce mentioned that the Japanese case simply shows that fiscal stimulus is "not enough." But even so, this is hardly a persuasive argument to make in favor of fiscal stimulus).
But then, there are a lot of really smart people out there that believe that it works. Take Brad DeLong for example in his debate with Michele Boldrin; see my post here. DeLong, being the economic historian that he is, even goes so far to give us examples that purport to show why fiscal stimulus will work. What are his three examples? Here they are:
 The 2003-2005 housing boom, facilitated by loose monetary policy; The 1996-1998 internet boom; The post 1982 boom following the easing of monetary policy, the Reagan tax-cuts, and increase in military expenditure.
Now are you persuaded?
Perhaps we should believe on the basis of what some econometricians report to be fiscal multipliers above one? No one will be persuaded; this "evidence" is simply not compelling. (Among other things, we know that based on the manner in which fiscal purchases are accounted for in NIPA, the "true" contributions to GDP are by definition overstated).
Where is the evidence? Somebody please tell me. I need something more than a thinly-veiled belief that the private sector is screwed up and that therefore "something" must be done by the government to correct this screw-up.
Let me repeat what I have said in earlier posts: if a case is to be made for fiscal stimulus, it should likely be framed in terms of its desired effects as a redistributive mechanism. Here, I think the evidence is much clearer and can be made much more persuasive. One may question why it is socially desirable to keep construction workers or auto workers employed when there is clearly too much product on the market, but at least it is clear how such a policy benefits these unfortunate workers.
I suspect that this argument is not made for two reasons. The first is political; i.e., it is much more politically palatable to sell a fiscal stimulus package on the grounds that "everyone" will be made better off. The second has to do with the way most conventional macroeconomic models are structured; in particular, they are usually one-sector models so that economists trained in these models have not often thought about how, in practice, fiscal policy is usually directed to specific sectors. Who knows...this is largely conjecture on my part.