December 24, 2008

How Not to Stimulate Economy, Indeed

Harvard professor Greg "Bush advisor" Mankiw posts some first class crap in his blog:
In thinking through the fiscal policy options and their implications, it might be useful to compare a few hypothetical, fanciful scenarios. Suppose that the federal government borrows some money and then...

Case A: uses the money to give a lump-sum payment (such as a tax rebate) to Joe Average, who chooses to spend his free time sitting at home watching Mork and Mindy reruns.

Case B: uses the money to hire Joe to sit at home and watch Mork and Mindy reruns.

Case C: uses the money to hire Joe to sit at home and watch Family Feud reruns, which Joe does not enjoy quite as much as Mork and Mindy.
How about:

Case D: uses the money to hire Joe to upgrade the national railway system, or

Case E: uses the money to hire Jane to give better education for 20 children, or

Case F: uses the money to fund Jack's research on new energy sources, etc.

There is no shortage of public goods that a government can take upon when the private sector absolutely refuses to make use of the available resources, preferring instead to sit on its hands and watch those Mork and Mindy reruns, or even worse, engage in blowing bubbles.

The private sector, especially the unregulated financial one, has already proven its capacity to misallocation of resources. It is high time to do something different.

Naturally, the government should take it easy on investment at times when the economy is red hot and there is scarcity of resources, but this is definitely not one of those times. Besides, those much needed public investments are soon cheaper than ever before. The situation would be much better, if the US government had gathered some surplus in the good times, instead of letting rip with massive deficits.

It's easy to make your preferred solution look good when you only compare it to even worse propositions. Why is it that some people equate government spending to burning bills? As if being paid by the government somehow makes everything worthless.

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