Sunday, September 6, 2009

Stimulus Forever?

How long should the stimulus continue? Here is the answer given yesterday by U.S. Treasury Secretary Timothy Geitner at the G20 meeting in London:

The basic imperative...is to make sure that we do enough, long enough, so that you really have a recovery in place before we shift to restraint.

Implicit in this view is the assumption that that stimulus is a necessary ingredient for recovery. Yet before 1914, when there was no Federal Reserve and no Keynesian economics, the economy experienced recessions yet recovered about as quickly as since the advent of government stimulus efforts.

Thus Geithner's view is convenient for advocates of stimulus. If stimulus continues long enough, it will appear that stimulus worked. Then politicians can take credit for saving the economy, even if stimulus was unimportant or even counterproductive.

13 comments:

Steve M. said...

it's all very simple... when the stimulus doesn't work they say they underestimated how bad the economy was, and it would have been even worse without it....

I would love to have those betting odds in Vegas.

DUB and BOBBY said...
This comment has been removed by the author.
DUB and BOBBY said...

hello professor,

I was wondering what your thoughts are about Keynesian economics. I am asking for your views, simply because my academia career is not sufficient enough to make such claims, for example, "that Keynesian economics will not work in this financial crisis". Was there an alternative to massive spending?

What if the government cut business taxes by some percentage that would have equaled the total stimulus? Do you think the people would have allocated their savings more efficiently than the government stimulus spending?

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