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More On the Allegedly Too-Small Stimulus Plan

Posted By Don Boudreaux On March 15, 2009 @ 11:46 am In Stimulus | Comments Disabled

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 [1],” March 9).  To support this claim, he points to the continuing loss of jobs.

If Keynesian theory [2] (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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[1] Behind the Curve: http://www.nytimes.com/2009/03/09/opinion/09krugman.html?_r=1

[2] Keynesian theory: http://www.econlib.org/library/Enc/KeynesianEconomics.html

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