Saturday, 19 January 2008

More on stimulus

Russell Roberts puts his 2 cents worth in on the idea of a stimulus package for the US. His very sensible essay Economist: Don't Jump the Gun on Stimulus Plans is on the National Public Radio (NPR) website.

Roberts makes the point
The standard stimulus package doesn't change incentives. It's a check from the government. The hope is that the receiver will spend it.
Steven Landsburg once wrote, "Most of economics can be summarized in four words: People respond to incentives. The rest is commentary". If you don't change incentives you will get little change in behaviour.

Roberts goes on to say,
But when you just send out checks from the government, whoever gets stimulated is likely to be offset by someone who gets unstimulated.

The money has to come from somewhere. If you raise taxes to fund the plan, the people who are taxed are poorer and they'll spend less. If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It's like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn't get any deeper.
A point politicians, and voters, should keep in mind.

Peter Boettke looks at the problems with public policy measures intended to provide short-term economic stimulus this way.
A less measured way to put this would be, why Keynesianism was wrong in 1936, 1956, 1976, and will be wrong in the year 2056. In other words, Keynesianism is just wrong analytically and practically as argued by both Hayek (analytically) and Friedman (practically). But it does have a powerful lure politically that has persisted despite its intellectual defeat by first Hayek, then Friedman, and finally by Lucas.
I think both Roberts and Boettke would agree that policies that try to provide short run economic stimulus have been less than successful and what we should be looking at is long run economic growth. We need policies designed to structure and align peoples incentives so that they are more productive and innovative, not policies designed to stimulate a politician's approval rating.

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