Friday, January 30, 2009

Thomas Sowell on slow stimulus programs

From Paul Kedrosky:

"
Sowell on Slow Stimulus

Nice quote from Thomas Sowell on slow stimulus programs:

"Using long, drawn-out processes to put money into circulation to meet an emergency is like mailing a letter to the fire department to tell them that your house is on fire."
- Thomas Sowell on the CBO's analysis showing only $26bn of Obama's $355bn public works package will be spent this year, 30/01/09.

[via Popular Delusions]"

Me:

Paul, The stimulus has many aspects. Tax cuts and social safety net money and aid to states will be quite quick. The infrastructure will not, but, it has a different rationale. It is to show that we have the confidence to invest in our future. Tyler Cowen mentions that it can seem like a placebo affect. However, I don't agree. The government needs to be seen investing in the future. Unless you're an anarchist, you believe in government infrastructure spending of some sort, so, as long as the investments make sense, what's the problem? They have an upside, which is more than just a placebo. They're also just part of the stimulus. They're more than I would have spent, but by no means the whole bill or crazy.

For a good discussion of the notion of the importance of confidence in an economic recovery, go to Free Exchange. You can certainly disagree with me on this, but I'm certainly free to disagree with Rational Expectation Theories and Ricardian Equivalence.

Paul again:

Nicely put, Don. As I read Sowell's comment, however, it wasn't an
either/or, it was more that the entire package tilted massive long,
which arguably over-emphasizes the "confidence" aspect over the
"stimulus" aspect.
» 3 hours ago

And me again:

Everyone has fair comments. My approach is behavioral. Let me give you an example. Oddly, productivity is rising. I account for that as being the result of employers proactivly laying off workers. In other words, layoffs are exceeding the fall in demand. Hence, productivity can go up for a while. I interpret the Real GDP numbers similarly. We expected a larger drop than actually occurred.
I call this a Proactivity Run. It is simply my view of Fisher's classic Debt-Deflation article. We will also have a Savings Spree. The only difference between my view and Fisher's is that I account for these actions using behavior. Hence, I see what we are experiencing now as the opposite of what we've just gone through: namely, exuberance and panic while ignoring fundamentals. If we can diminish the fear and aversion to risk, and focus on fundamentals, then we will find that we can move out of this crisis much easier than many believe. I find that Fisher's model is a very useful guide to what we are going through. My views are also a lot like Shiller's. Sadly, our debt level doesn't allow the kind of temporary stimulus that Shiller wants. But I agree with him that human agency, behavior, is the key to economic behavior. Other models I consider mechanistic, and based on a faulty view of human rationality and the relation of math to the world. I am also not an economist. I am just a citizen, which I why I appreciate all of the comments, especially Paul's. Many bloggers don't take the time to interact with posters.

Me responding to a comment:

The facts are otherwise. Normally, Productivity declines. Read Mulligan here for his view of why things are different this time around:

http://economix.blogs.nytimes.com/2008/12/24/are-...

I would write more about this but I have to go out to dinner. I'd be interested in whether you find my explanation or Mulligan's more convincing. Dean Baker has a view similar to mine.

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