Tuesday, January 29, 2008

Fiscal stimulus (amv)

The Bush administration plans to inject 150bn $ into the orbit of the US economy. Here is Steven Landsburg's objection to fiscal stimuli in general (it is a reply to Jason Fuman's "Keynes was right") :

Bad medicine for an ailing economy

By Steven E. Landsburg

Jason: I don't think much of our audience will be familiar with Keynes' "General Theory," so let me try to boil down your argument to everyday language: First, you think we should put people to work. Second, you think we can do that by getting other people to spend more. Third, you think people will spend more if they feel richer. And fourth, you think we'll all feel richer if the government mails out a bunch of checks.

Here's why I disagree.

First, when the government mails you a check, it's essentially making you a loan. That's because they're sending you money that they'll have to recapture with higher taxes in the future. You are hoping that if we shower people with government loans, we can get them to live beyond their means. The last time large numbers of people were showered with loan money and encouraged to live beyond their means, it was called the sub-prime crisis, which is what got us into this mess to begin with.

Second, the whole thing works only if these checks actually make people feel richer. But when people feel richer, they work less. That's not idle speculation; it's a well-established empirical regularity. On a larger scale, it's why we work 40 hours a week while our much poorer ancestors a century ago worked 60 hours. So — assuming you're correct when you speculate that government checks will make us feel richer — the average American will buy more but work (and produce) less. That can happen only if the difference comes from abroad. So the stimulus package, if it works at all, is a good way to put Asians to work, not Americans.

Third, it's not clear you're doing anyone a favor by putting them back to work in a dying industry. We cannot prop up unhealthy industries forever; sooner or later, workers in those industries are going to have to learn new skills and find their way back into another sector of the workforce. That can be an extremely painful process, but we don't make it any less painful by delaying it.

In sum, you (along with the president and the majority of Congress) are asking us to: shower people with loans to encourage reckless spending; somehow expect that the loan recipients will feel both richer and not richer at the same time (so that they'll spend more without working less), and; do all this in the name of delaying the sometimes painful adjustments that are going to have to get made a year down the line in any event. I object.

HT to Mankiw's Blog.