Friday, February 6, 2009

Stimulus Follies

As Congress fiddles while the economy burns, Matt Yglesias lists a few valid potential justifications for cutting the stimulus package before observing that actual justifications tend to the ridiculous:

Instead, people are just acting as if this or that idea is obviously silly. Terms like “X isn’t really stimulative” are getting thrown around. But why not? Money to refurbish the national mall is money that will be spent on salaries and on materials. Money to upgrade health care IT is money that will be spent on salaries and software and materials. Economic activity is economic activity. Jobs are jobs. And when people have jobs and earn salaries, they spend their salary on buying goods and services from businesses. And when businesses have customers they avoid layoffs and even hire new workers. It’s true that the merits of a lot of these specific ideas are contestable, and I wouldn’t cry to see some of them eliminated in favor of other, better ideas but the notion of just stripping some of this stuff out in favor of doing less and hoping for the best is lunatic.
This insight really can't be repeated enough: money spent is money spent; demand is demand; "economic activity is economic activity." GDP is, after all, nothing but a gross measure of economic activity, one that rather famously does not separate out economic activity we like from economic activity we don't like. GDP is falling off a cliff and that's the problem in need of reversal.

Economic activity is what is needed from the last source from which we can hope to expect it, government, given that we are facing a paradox of thrift and deflation. Dollars need to be put in motion as productively and wisely as possible, but now is not the time to squabble over deficits.

And by the way, we'll know that savings rates are too low and that government borrowing is materially affecting the credit markets in ways that forever excite conservatives by the very visible price signal for such: interest rates. When the fed's interest rates are somewhere above zero, we can begin to have a coherent discussion of the prospect of deficit spending "crowding out" private investment. We are a long way from that situation.

Spend. Now.

Also: a recent This American Life podcast includes (act three) an informative and brief discussion of the economic theories underpinning the stimulus. It's worth a listen.

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