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Objecting to stimulus...where subtleties are often lost...

A friend posted this article responding to an article in the Washington Post making a case for stimulus' effectiveness when applied during times of economic malaise in the US. I often see arguments along the lines of those indicated and wanted to put down a formal rebuttal of those points here:

A short bit on each of his objections :

1) On overstating degree of unanimity, this is an extremely subjective statement. He then goes on to point out a small sample of alternative reads from economists on the effectiveness of stimulus which only stand out because they are alternative reads. The consensus is that stimulus properly aimed and timed, consistently works. If there are opposing views on that statement they are in the minority...and stating that existence means that economists are not unanimous in their agreement as to the effectiveness of stimulus in general...is obvious and not really relevant.

2) On ignoring public choice, he has three issues:
a) timing -- The big error he's making here is that stimulus is not only about the effective injection of cash into the system to get the engine of productivity started up again. It is also about spurring the psychological changes in the populace, the workers and the employers that gets them to want to be productive again. The mental shift is a leading indicator to the changes that inspire productivity once funds are available but the mental shift alone *already starts it's own ball rolling*. This makes timing important only so far as the government is firm in stating its intentions to apply stimulus and thus inspire the confidence that then gets the productivity engine primed for growth. We saw how just the announcement of stimulus by Obama lead to a slow down in the economic collapse and now full on reversal and this is with what he states being so that much of the stimulus money is still yet to be spent...that's a good thing...it means that the stimulus in place will help stabilize things as the economy gets back on track...which is precisely what it is supposed to do.

b) off target -- It's a red herring to apply any significance to the previous hire state of individuals. Secondly, Keynes ...pure Keynesian theory is not advocated by any real credible economist...instead a hybrid approach dynamic Keynsian methods are described in the research. What he's doing here is like pointing to Newton's theories of gravitation and then beating up Newton for not predicting the perihelion shift of Mercury (which requires non linear mathematics...which wasn't invented until half a century after Newton). Just as we know that pure Monetarist ideas (Milton Freedman) are WRONG all the time we know that pure Keynsian ideas are WRONG all the time, the solution for any given system will be a combination...sometimes more or less of each. Still, in light of the importance of consumer sentiment to driving growth even before stimulus money is spent indicated in a) above...the factor of targeting is not as important.

c) The word "stimulus" implies short term impulsive injection of large amounts of cash...that's the whole point of it. It's a vague objection to mention that the stimulus is still in place years after it is announced...for reasons explained already in a) and b) above this should be expected. The main win from stimulus is how the minds of the human agents shift from thinking "doom,doom,doom" to thinking "win,win,win". Everything else facilitates this mental shift which when accompanied by real projects for people to see as a sign of growth allows productivity to return. Long term Economic collapses are more mental than monetary in causation...a monetary hiccup my trigger them but they stay because people are mentally stuck. It's like depression for an economy...in people depression is irrational sadness without physical reason...precisely what long term recessions and depressions are...so what are needed are ways to break the mental block that effects an entire economy. Things get a bit trickier when thinking about the effects of regulation of the markets that the Fed. conducts (and have often in their blunders made things worse) but ultimately it is still about mental (banks feeling they can't or can loan due to trust in other banks being able to pay back...etc.)

3) Long run /short run trade offs: This seems to be a restatement of ideas he mentioned in 2) which itself is a shade of things mentioned in 1) ...again, so long as the stimulus applied provides the mental shift necessary to get the gears turning then it's not really relevant to argue about debt. The creation process of stimulus packages are not open ended and the debt that may accrue is known prior to the implementation...but when you are in a zone where growth is negative and falling one must take the action to pay forward some debt to get out of free fall. We can quibble over how much is needed (in fact I've often thought that so long as the perception is given a shift can be effected...see Brazil's brilliant strategy in the late 90's to break the economic malaise in their currency at the time) So it may be the case that a level of hidden actions by the leadership may be effective in getting the consumers and the public companies to change their behavior (though this may be controversial).

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