[Stimulus Pun]

January 9, 2009

I was asked on New Year’s Eve whether I support the stimulus, so my resolution is to be able to answer that question. The old adage says that if you ask three economists about any issue, you’ll get seven different opinions, so here goes. On the anti-stimulus side, we have all of microeconomics. First, politicians spend other people’s money less carefully, and therefore less efficiently, than people spend their own money. Furthermore, the claim that the spending will be kept transparent and pork-free would not be plausible under normal circumstances. The rush to spend this money makes it even less so.

I continue to not understand (no joke!) the Keynesian argument, so I can’t respond to that. Macro theory is not easy stuff.

With respect to macro evidence, stimulus does not appear to be effective. Christina Romer’s work on this issue is widely-cited. The paper is titled, aptly, “What Ends Recessions?” and the abstract concludes that the answer is monetary policy, since fiscal policy is usually too slow, and when it’s not too slow its effect is small.

The macro theory argument is the only one in favor of stimulus, and I am fairly confident that Keynes’ General Theory is impossible for intelligent laypersons to understand (please try reading it yourself before you respond to this point). Micro theory says it shouldn’t work, macro evidence says it hasn’t worked in the past.

Tyler Cowen recommends this op-ed from David Brooks, and I agree that it is excellent.

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