Saturday, January 19, 2008

Stimulus Busting

Russ Roberts writes;
Love that word—stimulus. It sounds so scientific. With the right stimulus, you can even make the leg of a dead frog twitch. A heart attack victim gets the stimulus from those chest paddles and bam. Back to life. My online dictionary defines stimulus as something that "rouses or incites to activity." Sounds like the perfect prescription for an ailing economy.

But if politicians know how to stimulate the economy, why wait for a recession? If you can make the economy grow, why wait for bad times?

One answer is that a healthy patient doesn't need medicine. But the other possibility is that it's all hot air. Maybe we don't know how to make a $14 trillion economy move very quickly. And if we did, it would take a lot more than an injection of even 125 billion dollars.

There's that scientific language again—an injection. The politicians are always going to inject some amount of money into the hands of consumers and into the economy, like a doctor giving a lifesaving blood transfusion. But where does the economic injection come from? It has to come from inside the system. It's not an outside stimulus like the chest paddles or the transfusion. It means taking money from someone or somewhere inside the system and giving it to someone else.

The standard stimulus package doesn't change incentives. It's a check from the government. The hope is that the receiver will spend it. 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.

Or hear the entire piece on NPR

1 comment:

Maynard said...

This is the same Russ Roberts who thinks we don't need the FDA because, in his world, drug companies would never risk their reputations to sell lousy products. The man appears to be not only ignorant of the history of patent medicine, but of the very facts of the Vioxx case.

I think we can safely ignore his opinion on anything related to economics in the real world, as opposed to economics in his theoretical fairyland.