More On the Allegedly Too-Small Stimulus Plan

by Don Boudreaux on March 15, 2009

in Stimulus

Here’s another letter that I sent earlier this week to the New York Times in response to Paul Krugman’s insistence that the size of stimulus plan is inadequate:

Paul Krugman claims that the stimulus plan is failing because it’s “too small and too cautious” (“Behind the Curve,” March 9).  To support this claim, he points to the continuing loss of jobs.

If Keynesian theory (upon which the stimulus plan is based) were correct, insufficiently large deficit spending would indeed fail to restore full employment – but it would restore some employment.  Contrary to Mr. Krugman’s insinuation, in a Keynesian world deficit spending delivers some benefits even if it is too small to deliver maximum possible benefits.So the continuing slide of the economy in the wake of hundreds of billions of dollars of stimulus spending suggests that Keynesianism is invalid.

Sincerely,
Donald J. Boudreaux

Yes, one can yank out counterfactuals here — such as, “The loss of jobs would be even greater were it not for the current level of stimulus spending.”  But that’s quite a reach, especially in light of alternative, non-Keynesian theories of why job losses continue to occur — theories such as the one that says that the uncertainty, and the higher future taxes, created by the now-fashionable itch of government to intervene more fully causes investors to cool their heels.

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{ 8 comments }

Oil Shock March 15, 2009 at 12:38 pm
Dallas March 15, 2009 at 12:48 pm

The impact of a Keynesian stimulus should be larger for the initial spending, when there are underemployed resources available in almost all sub areas. When the spending uses all the resources in a specific area that becomes fully employment, there should be no stimulus or multiplier effect.

Labor is no longer fungible and specific sectors (such as heavy equipment operators) will rapidly reach a fully employed situation with a small amount of spending. Any spending beyond that point just drives up wages.

simone March 15, 2009 at 1:11 pm

While your observations are excellent, I do not think it is worth dealing with Krugman. Specifically, I do not think that it is worth reading Krugman's comments and discussing them unless he is willing to listen to others.

Mike Laursen March 15, 2009 at 3:12 pm

I've heard that the version of Keynesianism politicians are using to justify the stimulus is extremely dumbed down to the point where they aren't really following Keynes. Is that true? (I'm just asking. I'm not an economist, but I'm trying to educate myself.)

Michael Kolczynski March 15, 2009 at 4:49 pm

First of all, how can we critique the size of the stimulus? That's like measuring the efficiency of an engine by distance traveled. The stimulus is somewhere around $800 Billion. This amount is disbursed over 3 year period or something along those lines. As I've read, only 10% will be disbursed this year. Of that 10%, how much as been disbursed already?

Lets assume that the ideas behind the stimulus are true. Is it the overall size of the stimulus or the velocity that matters? Is the stimulus the same if it is 800 Billion dollars in three years as it would be in one year? Perhaps the size would be perfect if spent in a shorter period of time.

I disagree with all of those notions, but to discuss the size of the stimulus irrespective of the velocity of injection is something a nobel prize winner should not do.

muirgeo March 16, 2009 at 1:09 am

Why the meltdown should have surprised no one(mp3. From the Austrian scholars conference.

Posted by: Oil Shock

I listened to that and it was a good lecture. Much less dry and more witty then most from Mises site. Definitely he outlines some scary worst case scenarios. But again blaming this whole thing on government interaction and his faith in the markets correcting this seems counter to the evidence.

Either way he as the host of this blog have doubled up on their philosophical underpinnings and have made some bold predictions. Lets review them in 4 years.

MikeS March 16, 2009 at 9:54 am

What on Earth is Krugman on about? The stimulus was passed a month ago; most of it doesn't kick in until 2010 — and he *already* knows it's too small? Based on zero data?

I guess they don't make Nobel laureates like they used to.

The Other Eric March 16, 2009 at 11:41 am

Mike, no. No they don't.

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