A Bad Argument Against the “Stimulus” Plan

Disagree.

That “expectations” argument cuts both ways. We may see the potential impact of the spending, but we likewise know the damage from the inevitable tax hikes and the crowding of the inevitable borrowing.

More subtly but equally important, we discount future events differently. A small business may hope for greater sales because of future stimulus dollars, but will invest only guardedly, because such future dollars are always speculative. And in fact, a small business will discount the future benefits far more than it discounts the concommitant future harms. Human nature.

The net effect is a negative. Indeed, the greatest risk in the markets, the biggest “black swan,” is government-fabricated uncertainty,

Keynesian reasoning is now obsolete. Back when government was small, and debt markets slower to react, one could pull the old magic trick – cover two holes in the floor with one rug. That is, when government borrowed and spent, there would be increased activity where the spending occurred, BEFORE other markets slowed down in response. Metaphorically, the front edge of the rug covered the second hole, BEFORE the first hole realized it was uncovered. That lagged response may have permitted a multiplier of a little over one.

But now, with huge government, fast flows, twitchy anticipation, and differential discounting (as in the second paragraph above), the first hole feels exposed even before the heavy hand of government grasps the rug. The multiplier is today less than one.

My expectation is that it WILL happen. So, why is that WORSENING my "economically depressing anxiety"?

I think it takes more than just that the massive government expenditures will happen will relieve the depressing anxiety.

There are two things that must happen.
1) The money must be spent on the schedule that is expected.
2) The spending spending must have the affect anticipated.

This spending happens through time and as 1 and 2 become clearer, then agents in a Keynesian framework would update their expectations.

I think 1) is particularly important. If the pace of stimulus spending is slower than anticipated, then agents would reduce their expectations. Most economists right now anticipate a ramp up of stimulus spending in 2010 which has fueled some of the upward revisions to economic forecasts. However, if they had expected that the stimulus would only continue to grow at a slow pace, then I doubt they would change those expectations. In other words, because economists believe that 2010 stimulus spending will be faster than the depressed 2009, they have revised up economic forecasts for both now and 2010 under the expectation that firms will increase production in response.

The government can't simply announce a stimulus plan and not follow through. They have to make a credible effort to follow through with the plan in order for producers and consumers to adjust behavior today.

Regarding 2), I would just point out that these stimulus projects happen through time. If a government enacts fiscal stimulus that occurs over two years with half in one year and half in another. Then under your explanation the economy should begin to improve now (relative to baseline forecasts or what it would have done otherwise). However, if after one year consumer and producers haven't changed behavior to the extent that they would have under the theory and the economy didn't improve as substantially as expected, how would a rational agent respond? If I were an agent in that economy, I would guess that the theory and forecasts are wrong and I would downgrade my expectations and perhaps choose some middle ground between the two (all else being equal). Hence, I believe the effectiveness of a fiscal stimulus plan would also be important. Producers and consumers can change behavior in time if they believe it is not being effective (though that is not to say that this matters now, I'm speaking generall).

jimpierq-'Savings is here distinguished from hoarding -- such as stuffing cash under a mattress or burying it in a coffee can -- which is not productive and therefore is costly to an economy as it removes cash.'

So we should all be risking it on loans to banks? Interest rates are four fifths of f-all, even the 'capital preservation fund' I backed went south. I wish I'd put my money in a coffee can.

Instead of subsidizing demand, we should help producers....The only good way to reduce cost of goods...

You get a nice double whammy on price, right? Subsidizing supply shifts the supply curve to the right, and taxing everyone to do it, shifts the demand curve to the left.

Hmm...I wonder if government picking which producers to subsidize could have any unintended consequences on this desired outcome...hmmm....

Nicely put Don.

I agree, but the expectations game is a two edged sword. The Stimulator in Chief doesn't hand out cash willy nilly. Discovering eligibility and applying for a grant is very time consuming, and grants typically have matching requirements. For this reason, businesses may substantially change, delay or even cancel projects already in the works, because the existing projects don't qualify for a grant and require funds needed to match a grant if an application is successful.

You plan an investment this year, but the project doesn't fall into a category qualifying for "stimulus", so you delay this project to "invest" in persuading Uncle Sam to hand you a few million from taxpayers instead. You'll pursue the project you need next year, when the "stimulus" money isn't a factor.

I've seen evidence of this slowing of R&D investment in my business, which potentially qualifies for "stimulus" money but has slowed in the meantime, as project schedules slip toward the end of the year, waiting for "stimulus" money.

This basic point has been made here before, but I think it is worth saying again. The pro-stimulus argument rests heavily on a failure of rational expectations - money illusion, paradox of thrift and all that jazz. For a proponent of fiscal stimulus to claim success for spending that has not yet been made smacks of having one's cake and eating it too. People act in the expectations of money not yet received, but not in the expectation of having to pay it back? Why draw the line right there? The only reason I can think of is that it justifies the specious claim that fiscal stimulus is working. I suspect that neither observation nor theory can support this arbitrary break-point in expecations.

Just to clarify my last comment: It doesn't really negate Don's point; however, anyone who claims the expectations of future spending provides current stimulus must explain why the higher future taxes arising from the stimulus don't have a depressing effect on current economic activity.

Good point Don but wouldn't the same forward looking people who anticipate the forthcoming spending also anticipate the forthcoming taxes and/or spending cuts required to pay for the deficit-financed "stimulus"?

(Sorry for the repitition if someone else has raised this point in the comments--I haven't taken time to read them.)

Agreed. Bad argument.

The fact that an argument can be made does not make it a valid argument.

Of course, Obama was rather shrewd in his pre-stimulus marketing, making claims that can't be substantiated or effectively refuted, such as "creating or saving 3 - 4 million jobs." The list of arguments against the stimulus is pretty long, and no doubt there are some that are not valid, but I don't agree that this is one of them. At the very least, I can't see how one can substantiate the claim that these expectations have had an impact. What about an argument that expectations were never as bad as the statists' caterwauling would have implied?

Note-I didn't quite get that Dr. Boudreaux meant that the argument is not a good argument when used AGAINST A KEYNESIAN. Given that, sure, I agree. What about all those non-Keynesians (non-economists, etc.) out there who are being told by Keynesians that the stimulus is "working"?

Dr. Boudreaux, it seems to me the best argument to use against the stimulus would be to negate the whole notion of a plus 1 multiplier. Do you know of any empirical work done on the multiplier. I know Barro writes about a possible zero multiplier, which would obviously hurt the Keynesian case.
I'm taking a Macro class right now from a Keynesian prof...so I know the multiplier is going to come up as well as the paradox of thrift...I know the paradox is bunk but I need some help with the multiplier....

Thanks in advance.

"The average fiscal multiplier across all 43 recession episodes is -1.5."

"It is probably more appropriate to conclude that the fiscal multiplier is very small in open economies (and probably close to zero with a flexible exchange rate)."

http://en.scientificcommons.org/34265622

Thanks, that paper helps. Why do policy "experts" always turn to G instead of I or NX to raise GDP?
It's the Austrian in me that says, maybe that GDP we had before wasn't realistic in the first place anyway.
Wouldn't more G mean that the capital would not get reallocated to where consumer preference dictates? CARS is a good example of this. People weren't buying cars for a reason. So the Government says "Hey lets give all this money (inefficiently) to induce people to buy cars." Well what happens when the subsidy goes away? Now the car companies are worse off than they were before, but they did get a short term boost thanks to Government.

Because Keynesians don't understand wealth. They see money changing hands when people are gaining wealth, and assume wealth creation is the act of money changing hands.

The very idea that any of those things (GDP, NX, etc.) can be manipulated and still keep their meaning is absurd. GDP isn't a measure of productivity or wealth. It is merely an accounting of money transactions. It doesn't matter to GDP if the transactions are wealth producing--like when people voluntarily trade for mutual gain, or when it is wealth destructive--like when the government forcibly takes from one person, to give it to another person to perpetuate unvalued activities. If an economy is dominated by the former, then GDP happens to correlate positively with wealth creation (because the only transfers allowed are ones in which each party involved has determined that it makes him wealthier). If an economy is dominated by the latter, GDP correlates negatively with wealth creation.

You may as well call it GDAP (Gross Domestic Antiproduct).

Well, for one thing you do see them turn to I and NX too. That's why tax cuts and loan guarantees are an important element of stimulus. But part of the reason why you turn to G is because I increases in response to lowering interest rates... and when interest rates hit a zero lower bound there's no reason to expect I to increase anymore. You turn to G when you tap I out, essentially.

And I share those concerns about allocation. It's DEFINITELY a tradeoff between growth and efficient allocation. Some stimulus I think is very efficient allocation - particularly if we've underinvested in public goods. But obviously there's no guarantee (and CARS is a great example of bad allocation). Efficient allocation is a good thing. Keeping suffering to a minimum and arresting wage-price spirals that add nothing to efficiency is a good thing too. Peoples' normative positions are going to have them coming down at different points on the tradeoff, but that doesn't invalidate the economics of the tradeoff itself.

The problem is, the Government has no incentive to allocate efficiently. They allocate based on corruption and cronyism, just like CARS. CARS is a perfect example of how our Government works, that is the model of what the politicians see as efficient.
He who has the money, which was made through the current status quo, gets what he wants because he can give more to the politicians. The status quo is based off of an inefficient mechanism that needs to be replaced. We don't know what new technologies or innovation will lead to a more efficient mechanism as compared to the previous (aka status quo) So when the politicians base their policies from the wishes of the money men, the new innovators will get crowded out.

Note that they exclude "automatic stabilizers" from the analysis entirely. They're looking only at discretionary balances (page 17). And yet automatic stabilizers formed the bulk of the stimulus package here and in Europe.

So, most multiplier studies you see just look at the impact of deficits. This is only looking at a small portion of the deficit. Their logic on why they're doing that doesn't really make sense to me.

Seems you don't know how to read.

They are criticizing the USUAL analyses for NOT including automatic stabilizers. These authors use fiscal balance, which inherently includes them. This is why they say, rightly so, that their assessment is more accurate.

THINK about it. Adding the cost of automatic stabilizers should decrease the benefit:cost ratio and decrease the multipliers. If what you said is true, then adding the a.s. would make the multipliers EVEN LOWER.

Gah - I just can't read at 5:30 in the morning. Thanks vikingvista.

My assumption was they excluded it and controlled for other budget elements so that the multiplier wouldn't be lower it would just be attributed to other controls.

Interesting that this is so low then - it diverges from the paper the IMF released this year that I posted above. Then again that had some very low estimates to associated with smaller economies. I think the small economy multiplier was around 0.5 while the large economy multiplier was around 1.5 in that one.

What does a small multiplier mean then? If the Government spends 1 dollar with a multiplier of 0.5, that only gives you 50 cents of spending of which they had to steal a dollar to do it. Where did that other 50 cents go?

They usually borrow or tax dollars, they don't steal them.

Ya, that's basically it. I mean, it's a current boost vs. later boost tradeoff, and since we know we're going to be richer later and that we're in a depression now we might not feel it as being too painful. But at the end of the day it's still a dead-weight loss. If you're in a situation with multipliers less than one there's no reason for fiscal stimulus. I wanna stress though that this isn't the kind of multiplier people usually come up with.

Even people who don't necessarily like fiscal stimulus - like Christie Romer (she's a monetarist) doesn't think that the multiplier in a deep recession is this low. Doesn't mean the analysis is wrong - that's just the distribution of an estimated effect for you. But it's not the dominant answer either.

"They usually borrow or tax dollars, they don't steal them."

So what is the salient difference between stealing and taxing?

I hereby reference every single other discussion we've had on this. You're not going to give me a free pass on it - I respect that. My intention was simply not to give Justin Palmer a free pass on an a priori that most of the world thinks is crazy.

Taxes aren't voluntary. The Government takes your money through the treat of violence. That's stealing. If it makes you sleep better at night by using a different euphemism, then so be it.

When you borrow money, you have to repay it with interest. The only way the Government can pay back that money is to tax future generations, aka steal from our kids.

This is a good compendium on multiplier estimates: http://www.imf.org/external/pubs/ft/spn/2009/sp...

It suggests somewhere between 1 and 1.5, which I think is a pretty standard answer you'll get from people. I've always found Barro's case a little odd - he estimates a multiplier at a time when output was growing, if I'm not mistaken. What is the point of that - I've never understood? Fiscal stimulus isn't supposed to work in an economy that isn't depressed. I'm not sure why he thinks it's especially meaningful to have a 0.8 multiplier (in his Korean War research), and multipliers not significantly different from zero in other cases.

Which raises another problem with estimating multipliers - fiscal stimulus usually occurs when the economy is shrinking, so it's very easy to underestimate multipliers. It's very hard to figure out what the right baseline to compare it to is: and that undermines the arguments of proponents and opponents. Both have a much harder time making their case. In those conditions, though, you would expect estimates to be underestimates, something Christina Romer often points out.

If the economy isn't depressed and you don't have evidence of excess savings, then it's very likely government spending, which we all know is relatively inefficient, is going to crowd out more efficient private spending, and you'll have a less than one or even zero multiplier. Multipliers become more defensible as you have greater savings overhands and depressed demand, and 1 to 1.5 seems to be generally safe (interesting side note - early Keynesians thought it might be as high as 4... needless to say giving decent ideas a couple decades to mature and be tested makes them much better than when they started!).

Why do you say the paradox of thrift is bunk?

"Why do you say the paradox of thrift is bunk?"

Hayek is very clear on this. I believe his article is entitled, "The Paradox of Thrift." The basic argument is that thrift is not a drag as long as it is saved or invested, because those activities are the basis for eventual economic expansion. Hoarding is problematic, though.

Re multipliers, since you cite Romer on the (very dubious) multiplier of government spending, what about a comment on her work vis a vis the costs of taxation, which are substantially higher than the multiplier she arrives at?

Well what do you call "saving but not investing" - is that hoarding? Clearly if it's invested there's nothing to worry about. I'm not sure what the difference is between "hoarding" and "saving but not investing" - ie, it sits in your bank and they hold onto it either because they're scared and need to cushion their balance sheets, or nobody is investing so nobody is demanding it. Anyway - under the no investing condition of course I'd agree with you, but that wouldn't be paradox of thrift, would it?

Why is Romer very dubious? She's one of the best in the field. Besides, she was just raising critiques of Barro that a lot of other people have as well. And even if she is dubious, the critique still stands. Coming from a dubious source doesn't automatically refute the critique. Regardless, yes - she found much higher multipliers for taxes. One important note on that paper is that it looked at tax policy throughout the post-war period - it did not emphasize the tax multiplier in a depressed economy. In depression conditions you'd expect traction on tax stimulus to decrease and spending stimulus to increase. But that's why the stimulus is composed of tax and spending stimuli.

I was referring not to Romer but to the multiplier when I said 'very dubious.'

ah ha - my apologies. i was reading that very early in the morning. The 1.5 figure is actually one that comes up across a variety of research, and it's currently used by the Fed too. Not that that's a protection against dubiousness, but there's no need to worry that it's not robust.

It is bunk primarily because it only holds true if people behave in absurd self-destructive ways--ways in which people on the whole have not behaved and would not behave.

In particular, it assumes people prefer drawing from savings over seeking efficiencies. It subsequently ignores the amplification of the latter effect through propagating/signalling behavior like cutting consumption.

And of course it must ignore that, since that is how an economy restructures itself toward meeting people's desires. Keynesian "stimulus" instead artificially reinforces existing ineffective consumption patterns at the expense of the emerging new effective ones.

In other words, if Keynesians were to recognize the reality that people prefer adapting for efficiency over drawing down savings, they would realize that their own spending policies are counter productive, and they could no longer be Keynesians.

Well, of course any countercyclical spending isn't going to be an ideal spending mix. That's why you're not trying to fill the entire output gap with it. It only composes a couple percentage points of the economy. Nobody is ignorant of the fact that that spending isn't going to form the basis of the future economy - the hope is that it's sufficient to arrest an unnecessary wage-price spiral.

Besides, countercyclical spending usually goes towards public goods that the market won't spend on anyway. That doesn't make it good spending necessarily, of course. But it's a reason why we shouldn't simply assume that "new effective consumption patterns" exclude some of those public goods. Either way, the point isn't planning. The point isn't efficient allocation of resources. The point is the prevention of the unnecessary wasting away of productive resources and unnecessary suffering (and of course there's a lot of necessary wasting away and necessary suffering that goes on in a recession too).

"the hope is that it's sufficient to arrest an unnecessary wage-price spiral"

Daniel - where and when has such a 'wage-price spiral' occurred under a free market regime? Perhaps you have an instance, but failing that, in my estimation, it is an imaginary construct whose primary purpose is to justify massive government intervention in an economy.

I'm not sure what you'd consider a "free market regime". More broadly we've seen it in it's infancy in this recession, we've seen it in Japan in the 90s, and we saw it back in the 30s. It's not an every day thing.

You're really not giving people enough credit if you think it's just a sneaky rationalization for big government. Call us wrong and back it up, but don't take the unverifiable way out and call us justifiers of big government.

I can't go with you on this recession -- the fact that some Keynesian scaremongers said we were in an economic death spiral does not make it true. Ditto for the Depression -- entirely government-manufactured. I have no opinion on Japan.

<You're really not giving people enough credit if you think it's just a sneaky rationalization for big government. Call us wrong and back it up, but don't take the unverifiable way out and call us justifiers of big government.>

First of all, it is an opinion.

Secondly, it is my firm conviction that it is those who advocate government intervention who are obligated to back it up. The USA was founded on the bedrock principle of limited government, a principle that is now flouted with abandon, in no small measure thanks to JM Keynes' economic principles. The default position ought to be, as it once was, that each man is free to arrange his own affairs as he sees fit so long as he refrains from injuring others. You are being disingenuous if you think it is a coincidence that the Obama administration -- the Big Government Team par excellence -- is full of Keynesians.

"death spiral"???

You're going to have to go to the town halls for that scare tactic. I didn't say anything about a death spiral.

Look, I'm comfortable with Obama, Keynes, the founders, and limited government. Sorry that's causing you such cognitive dissonance.

Keynes (and others of course, but him primarily) provided FDR and others with an economic rationale for a de facto abandonment of the principle of limited government. Government intervention in the economy to the extent instituted by FDR cannot be argued with any intellectual honesty to be consistent with the Constitution as written. One must engage in some incredible mental gymnastics to make that claim, and certainly to claim Obama - who would involve government in every nook and cranny of our existence - can be reconciled with limited government. Obama has said as much - complaining that the Consititution is fundamental backwards: instead of saying what the government must do for the people, it instead says what the government is not allowed to do. "Not allowed" -- the same as "limited."

So, if Obama is your guy, be honest and admit that you agree with Obama that the idea of limited government doesn't make sense. Otherwise, you are stuck trying to make sense out of the notion that government control of retirement funding health care and energy and the financial system and on and on (he does have at least 3 years to go, so who knows what else?) are all consistent with this:
"The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."
--Amendment X, US Constitution

[RESPONSE TO LINK ABOVE]

I think that's a great piece by Kling. I compeltely ascribe to his caution on the data and on cofirmatory bias. But I would in turn caution him about the exact same thing. Econlib (and this blog, and mises) are RIFE with confirmatory bias (at least from my perspective) but it doesn't SEEM that way to people who agree. The inflation/Keynesian fiscal policy connection is one I always chuckle at. We're supposed to be terrified of inflation right now, right? Obama's deficits are going to make that awful. Well then why did it take New Deal and WWII deficits DECADES to result in an inflation in the 70s? Indeed, by the time of the inflation the debt as a percent of GDP was at a post-war low! Austrians never seem to address that question. Why? Confirmatory bias, that's why. The most obvious answer is that Keynes was more or less right about liquidity traps as well as cost-push inflation. But that obvious answer doesn't mesh with the Austrian paradigm, so they overlook it.

I don't think that's PROOF of anyone's theory. And I'm certainly not raising this point as a challenge to Kling at all. Indeed - I'm raising it as a generalization of exactly what Kling is saying. It's a great post! And like he said, we don't have the data to say for sure.

But the reason why the New Classical/Austrian school isn't in politics isn't because they have more scientific proclivities than the New Keynesians. They're not in politics because they're philosophically anti-political! MAYBE that means New Keynesians are engineers, maybe it doesn't. But the fact that the New Classical school is anti-political doesn't by any stretch imply that it's more scientific or immune to confirmatory bias.

Great link! - thanks.

I didn't understand the term "scientific" to be a claim of immunity from bias. Wasn't it Mankiw's term? I wouldn't think he would argue for that.

<Why? Confirmatory bias, that's why. The most obvious answer is that Keynes was more or less right about liquidity traps as well as cost-push inflation. But that obvious answer doesn't mesh with the Austrian paradigm, so they overlook it.>
-- I have acknowledged that I am no economist, but I would love to see you and Milton Friedman debate this point. Isn't it true that the deficits from WWII were reversed immediately, and the debt paid down substantially in pretty short order? I've never read anything saying WWII and the New Deal were responsible for 1970s inflation. It seem to me Austrians consistently blame inflation on money supply being expanded beyond the level called for by production. So there may be confirmatory bias, but not where you are looking. Your claim about Keynes' answers being right is far from "obvious" as long as confirmatory bias is left out.

Actually, I believe an Austrian response to Kling's post would be general skepticism of macroeconomics as a discipline. I quite agree with you as to why Classical/ Austrians are not in government. Unfortunately, that leaves government policy to the wrong people.

RE: "It seem to me Austrians consistently blame inflation on money supply being expanded beyond the level called for by production."

And in that case, why don't they ever explain the Japanese counter-example? In Japan in the 1990s they pumped money into the system as surely as we're pumping it into it now. And yet not a bit of inflation... in fact, there was deflation. Why don't the Austrians ever explain that? Confirmatory bias. The more obvious interpretation is that liquidity traps are real - that all this Keynes bashing is unwarranted.

And I should say - they don't just fail to explain it. They fail to even talk about the issue at all.

That's one of my biggest problems with the Austrian school - it's so damn insular. It can be like a cult. People call Keynesianism a cult - but Keynesianism has changed TREMENDOUSLY since the thirties. How much has the Austrian school changed? Not that much. That's a pretty good sign that things are taken more on faith or at best dedication to a philosophical foundation than on rational scientific inquiry.

"I didn't understand the term "scientific" to be a claim of immunity from bias. Wasn't it Mankiw's term?"

No, certainly not immunity from bias. Mankiw (and then Kling) were contrasting scientist with engineer, and I suppose saying engineers were more susceptible to confirmatory bias. I (1.) am not sure that is true that they are more susceptible, and (2.) agree with you that scientists (and Austrians and New Classical School) are very susceptible to it too. AT LEAST as susceptible to it as the "engineers". After all... engineers have to actually make it work. They have less latitutide for abstract theorizing.

"I've never read anything saying WWII and the New Deal were responsible for 1970s inflation."

No - exactly. I probably worded that confusingly. We hear now that the debt will cause inflation. But we don't hear from the people who claim that the current debt will cause inflation why WWII and New Deal debt didn't. Not that they claim they didn't, they just never seem to bother to address that very obvious counter-example. I actually agree with Friedman for the most part on the causes of the 1970s inflation. I don't agree with his statement that "inflation is everywhere a monetary phenomenon"... he probably could have allowed a little more room for Keynesian cost-push explanations. But as far as it goes, I buy into Friedman's understanding of all that. A sin of omission, rather than commission, if you will :)

"I believe an Austrian response to Kling's post would be general skepticism of macroeconomics as a discipline"

They sure wish you would think that, wouldn't they? And yet they always seem perfectly willing to chime in with a fiat-currency centric model of the business cycle. That always struck me as fairly macroeconomic.

"Unfortunately, that leaves government policy to the wrong people."

Aww, now that's uncharitable ;-)

RE: "Obama has said as much - complaining that the Consititution is fundamental backwards: instead of saying what the government must do for the people, it instead says what the government is not allowed to do. "Not allowed" -- the same as "limited.""

You're conflating two different parts of that interview. He said it was "backwards" insofar as it didn't outlaw slavery. I acknowledge that the founders' hands were tied on that issue, but I can't argue that it was still backwards on that front. You're completely wrong on the negative/positive rights question (which regardless was discussed at another point in the interview entirely). Obama said that BECAUSE the Constitution is a document of negative rights and not positive rights, the Civil Rights approach of pursuing things through the courts was doomed to have limited success. With a negative rights Constitution, it's not the court's job to do that - it's the job of community organizing.

Anyways...
RE: "So, if Obama is your guy, be honest and admit that you agree with Obama that the idea of limited government doesn't make sense."

Nope - I don't have to submit to or accept your silly caricature of him. The Congress has the enumerated power to appropriate money for the general welfare, as well as to pass any other legislation that is necessary and proper for exercising that enumerated power. And I'll be damned if I cow on that one to anyone who attempts a "more Catholic than the pope" approach to the Constitution ("more originalist than the Framers?"). I have the utmost respect for the Constitution and limited government (it's hard to grow up in Virginia - a stone's throw away from Mount Vernon - and not get inculcated with that respect).

I respect the fact that you have a different view of things. But I won't respect an implication that I think limited government doesn't make sense.

Regrettably I don't have the transcript of that interview. I don't believe I am conflating anything, only paraphrasing his remarks to summarize the gist of his appraisal of the Constitution.

You don't need the transcript - listen to it on youtube. Your interpretation bears no resemblance to what he said.

Remember confirmatory bias.

I'd like to do that. Can you tell me how to find it? No doubt Obama is on YouTube millions of times.

http://www.youtube.com/watch?v=a_xNyrzB0xI&feat...

This is "constitution is flawed"...

This is about the constitution as a document of negative rights, and therefore the courts not being the best (or at least a sufficient) route for civil rights movement:
http://www.youtube.com/watch?v=3VctiYQplw8

Silly caricature? An objective look at his legislative agenda is all one needs. Based on your definition of limited, I wonder if the Chinese Communist Party could qualify.

There is nothing limited about this claimed blanket authority.

I don't claim a blanket authority, and I don't countenance Chinese Communism.

The Congress has the enumerated power to appropriate money for the general welfare, as well as to pass any other legislation that is necessary and proper for exercising that enumerated power.

It is difficult to see any aspect of our lives that is not covered by this interpretation of the Constitution. It is in that sense I refer to it as "blanket authority." What limits are there?

That's not really an "interpretation" of the Constitution at all... that's a verbatim quotation from it. The first and last clause of Art. 1, Sect. 8. The interpretation comes in when you talk about what "general welfare", "necessary", and "proper" mean. My "interpretation" of those verbatim words is probably broader than yours, but it's hardly "any aspect of our lives".

Look - those are the words. You have to interpret them just like I do. You clearly can interpret "general welfare" in a limited but non-trivial way. Trust that I can too. And we'll fight it out in Congress.

"The Congress has the enumerated power to appropriate money for the general welfare, "

What does Madison have to say about this phrase?

Madison's got his own view. Others had other views. I don't think this enummerated power means anything is fair game - but I also don't think Madison (great guy that he was) gets to dictate to everyone else what it means.

Madison had the huge advantage of being the last one to die. But just because he could make those pronouncements after the fact doesn't make them gospel truth.

He is considered the Father of the Constitution - I daresay his authority on the subject trumps Obama's - and even yours. Given the choice between Madison and Obama, I'll take Madison every time.

Haha - and with respect to our discussion the other day, I know that came across a little serious :) I don't mean to be cross, but I don't mean this to be oneof those "light retorts" either. You've just got a lot of holes in your approach.

I was not putting words in your mouth - these words are out of Obama's mouth. OK, so I dramatized with the word 'death,' but it was Obama himself who tried to scare people by telling them that without the Porkulus, the economy would spiral downward with no end in sight. That is pure, undadulterated demagoguery. I can't wait to see how you defend it.

That response just goes to show how much of the debate is driven by the priors that people bring to the table.

Which is why I personally find the economics of the issue a lot more engaging than the politics of the issue.

I am sympathetic to your point, and it is fairly made. On the other hand, wouldn't the moderators of this blog argue that macroeconomics is substantially driven by priors as well?

It seems to me also that the economics and the politics are closely linked, and in both directions.

"Free market regime" means laissez-faire, a la Adam Smith, Milton Friedman, von Mise, et. al.

And I should say -

Your prior that the stimulus is bad isn't a prior in macroeconomics at all. That's the conclusion that you draw from macroeconomics. Ie - I think macro takes one more step back (and it's the more interesting step, IMHO).

Let me try to elaborate on my point about macroeconomics and priors. I refer you to this link:
http://econlog.econlib.org/archives/2006/05/mac...

In the interest of space I cut and pasted what I just wrote to one of your links immediately below!!!!

Certainly the utility of the findings of economics ensures that the two are linked. Hell, I do policy analysis for a living. One of the most important things about having economics is that it helps us know what is right and wrong about different public decision making.

But in macroeconomics at least, it's not acceptable to hold a prior just for the sake of holding a prior. If you're Ted Kennedy, liberalism is right because you think it's right and that's really all that matters. In macroeconomics, you can certainly have the prior that there is a diminishing marginal propensity to consume - but you're obligated to justify that prior to a much greater extent. And rightfully so.

And maybe that was my mistake. Having "priors" are just a fact of life. But macroeconomics is in the business of you and me arguing over your prior that the stimulus won't help. Politics presupposes those priors and mainly deals with the fighting and motivation to get these things passed (or defeated).

A tangled mess indeed, though, when it all gets put into practice.

Look, Jim, he's comfortable with all of it - no matter how mutually exclusive it might be. He loves both tyranny (but prefers a different name as "tyranny" is so bourgeois!) and he loves liberty. If you find this inane....well, you just misunderstand him.

If you argue that tyranny kills liberty, so that if you argue for tyranny you are de facto arguing against liberty, then Danny will have a fit declaring that he NEVER ever argued against liberty. He loves liberty. It's great. He's just saying there's an argument made by others (not him) that tyranny is better. How could you be so nit-picky with his arguments when he got such good grades in college last year?

I do appreciate the guidance. I was getting there on my own.

Somebody's cranky :)

Yes, Obama = tyranny. We all know what you think on that by now methinks.

The PoT very specifically claims that individual savings results in no aggregate savings. That IS bunk, for the reasons I gave (and for some that I didn't give).

You are changing the subject to talk about other bunk.

"No" aggregate savings? I have no idea what you're talking about vikingvista.

You talk as if the paradox of thrift is a general case. It only exists when when we reach an interest rate floor and there can be an excess of savings over investment.

The concept you just provided - that individual savings result in no aggregate savings - is obviously bunk. I've never heard anyone promote that idea though. You're putting up strawmen.

YOU: "I've never heard anyone promote that idea"

PK: "if falling consumption causes the economy to fall into a recession, incomes will fall, and so will savings, other things equal. This induced fall in savings can largely OR COMPLETELY offset the initial rise." (emphasis mine)

--http://krugman.blogs.nytimes.com/2009/07/07/the-paradox-of-thrift-for-real/


Or do you now care to argue that Paul Krugman is not a Keynesian?

OK, but that's not what you claimed.

You said no aggregate savings. Krugman is saying no net change in savings. VERY different things, vikingvista.

That sounds a little over the top from Krugman, but honestly I have no basis in knowing how much a recession/depression negatively impacts savings. For all I know he's right. I personally wouldn't make the claim myself, but I definitely don't think he's saying what you said earlier.

"aggregate"

You are right. I misstated. My intention was net savings, and everything that I wrote applies to net savings (which should be clear from my past descriptions of PoT.) I'd go back and edit that word from my post if we hadn't launched a whole thread from it.

Thanks for the correction.

The PoT is still nonsense for the reasons I stated.

"The PoT is still nonsense for the reasons I stated."

Nonsense! :)

That was actually a great link you posted. Often Krugman's post just rush through things shorthand because he assumes his readers know what he's talking about. That's one of the more accessible posts on paradox of thrift.

"Hoarding" (that is, demand for money) isn't a problem either.

Reisman: http://blog.mises.org/archives/005763.asp
Rothbard: http://mises.org/money/2s9.asp
Hoppe: http://mises.org/story/3449
Murphy: http://mises.org/story/3194

excellent stuff - thanks

I was thinking the same thing.

"...the very expectation that such massive government expenditures will happen goes a long way toward relieving the economically depressing anxiety of consumers, employers, and investors."

Doesn't this presuppose that consumers, employers, and investors are a) knowledgable about where the stimulus money will go and how deeply it will affect their own interests, and b) confident that it will be spent effectively?

Considering how fast the $787 billion, 1588-page 'stimulus' bill was rushed through congress, I think (a) is impossible. I doubt the authors of the bill have such knowledge.

I would say that (b) is a stretch, too, even if consumers, employers, and investors aren't well-versed in political economy, and don't realize the utter inefficiences that pervade bureaucratic management. That is, unless they KNOW that they will be directly subsidized in some way, (b) doesn't hold much water. Consider that the Cash-for-Clunkers could have had no effect whatsoever on purchases. I'm not saying that particular program was effective in the long run, but it undeniably bolstered sales while it was in effect, thus exacting the supposed end it was supposed to. Notice Democrats are calling it a 'success.'

The "expectations" argument gives too much credence to the power of government spending. I don't see that it is there, and thus I would be willing to say that you could use the argument that the stimulus plan has been ineffective, unless (a) and (b) could be proved.

Again, I don't buy the Keynesian argument. I'm simply saying that, because the intellectual case for the "stimulus" is built on a Keynesian foundation, pointing out that many of the "stimulus" dollars have yet to be spent is not an argument that Keynesians would find persuasive as one aimed at debunking the notion that the buoyancy of the economy lately has been helped by the "stimulus" package.

So this means once spending picks up from the private sector and the stimulus funds still haven't been spent yet, we can cancel the stimulus right?

In your dreams!

RebelRenegade -- A good Keynesian would likely agree (although there are, to be fair, several variants of Keynesians).

Great point, but I must ask, what is a "good" Keynesian? Sounds like an oxymoron. ;-)

Good Keynesian is a good actuary, not a good economist. He is good @ statistical sleight of hand.

I think a good counter to this animal spirits point is that people may also be nervously watching the mounting deficit and begin saving for a rainy day because of the inevitable growth in taxes to come.

Not that saving is bad. I think saving is good, but Keynesians would disagree.

What do you mean Keynesians disagree that savings is good? That's news to me. You're not generalizing the very specific case about the paradox of thrift are you?

How do you mean 'very specific'?

In other words, the only time before now I think anyone has seriously argued we were in a paradox of thrift situation was in the 1930s. And yet somehow the paradox of thrift gets conflated into "Keynesians think savings is a bad thing" just as a matter of course.

Do you disagree that the paradox of thrift is an issue currently being brought up by prominent Keynesians? Is it not still going around that if U.S. citizens start abruptly saving now then aggregate demand will decrease, and etc. etc. we are in that dreaded sprial? right?

I'm not saying unviersally that Keynesians say saving is bad, I'm saying that right now when talking about this recession it is an issue.

It's entirely possible I'm wrong, I'm not a Keynesian, but this is what I've been lead to believe based on Krugman and mainstream economist opinion.

Well yes - many of us are saying the paradox of thrift conditions are applying now. But isn't that different from saying that Keynesians disagree about savings being good? That's all I'm saying - and I asked it in the form of a question because I wasn't sure. If you're not saying that universally Keynesians say savings is bad then we're on the same page :)

Even then, "savings is bad" seems like a harsh version of the paradox of thrift. Savings have paradoxical unintended consequences in this very special case.

I beg to differ that Keynesians in general would limit the "paradox of thrift" to the Depression and the current "crisis" only. I do think the paradox of thrift, as I understand it, is a faulty notion. My reading of the Austrians' take on it, especially Hayek, is that it mistakenly places a higher value on consumption (more precisely 'present consumption') as against savings (more precisely, 'future consumption.') Savings is here distinguished from hoarding -- such as stuffing cash under a mattress or burying it in a coffee can -- which is not productive and therefore is costly to an economy as it removes cash. Savings, since the deposits can be loaned out for productive investment, is in no way damaging to a recovery, but in fact generates recovery. Since the savings are invested productively as determined by individual decisions, as opposed to "stimulus" which is spent according to the very partial knowledge of those making the spending decisions, they are far more efficient and productive than any government "pump-priming."

This is one of my problems with Austrian economics... everything gets so value-laden and emotional. No, it's not that consumption is of higher value. It's simply an observation that if consumption demand is low enough because of high savings at a point when investment demand is already weak, a sharp change in savings rates can exascerbate recessions.

But I agree with you - if savings are not in excess of investment demand, fiscal stimulus is terribly inefficient and wrong-headed. That's why it's such an unusual policy response... usually the perscription is monetary stimulus or tax cuts. I think the Austrian fallacy is in assuming that the supply of savings will always create a demand for savings. It doesn't always, and when it doesn't things get very bad.

I am uncertain as to what you mean by a "supply of savings".

I am not familiar with any Austrian assumption in this regard.

To my understanding, the Austrian assumption is that savings represents foregone or postponed consumption which leaves more resources available for capital investment in future production.

Exactly. The interest rate is the price of money, or in truth the discount on the future wealth production it represents. The interest rate calibrates current consumption with future consumption (savings). My argument with daniel is that the Keynesian notion of "too much savings" is a mirage.

Minor nitpick: Interest rate is the price of time, not the price of money.

Otherwise, I wholeheartedly agree with your post.

Muchas gracias.

Emotional? How so?

Rather than consumption, perhaps another term would be more accurate. Keynes does place ultimate value on aggregate demand, which is why he claims "pump-priming" by the government is effective policy.

"if savings are not in excess of investment demand" -- I believe the interest rates serve to balance supply and demand here. I believe it is erroneous to contend that Austrians contend that the supply of savings will always create a demand for savings. The demand for savings comes from the assessment of millions of individuals that, for some portion of their funds, future consumption at the available interest rate is more valuable than present consumption. Perhaps you don't like the Austrians because you aren't that familiar with them.

So maybe this will help you give a little more benefit of the doubt to paradox of thrift as being more than bunk:

You and I agree that under normal circumstances when there is more savings than there is investment demand, interest rate adjustments ensure that the market clears. When there is a lot of savings, the interest rate ticks lower and lower and lower. So my question to you is - where does that pressure go to when the interest rate hits zero?

Like it is here:
http://research.stlouisfed.org/fred2/series/DCP... (commercial paper)

http://research.stlouisfed.org/fred2/series/DCD... (certificates of deposit)

http://research.stlouisfed.org/fred2/series/DTB... (Treasuries)

http://research.stlouisfed.org/fred2/series/DFF... (Federal funds rate)

What happens to price signals and market correction when the price is a big whopping zero and you still have a great deal of excess savings (consult BEA data... we have a great deal of excess savings right now).

The result is essentially hoarding, and when the pressure can't be released through interest rates any more the economy contracts because of depressed investment and consumption demand.

Now you've got depressed investment and consumption demand and you've got a lot of cheap money. One solution MIGHT be for a well positioned actor that isn't constrained by the profit motive take advantage of that cheap money and create demand (along with all the admitted problems that "creating demand" entails).

That's the Keynesian argument.

I don't expect you to buy it... I just don't want you to mistakenly think that we're ignoring the role of interest rates or the that we're discounting the importance of markets or saving or investment. And I should say this is also why it's so bizarre to hear Austrians talk about how this crisis eviscerates Keynesianism. Everything we're seeing is textbook Keynesianism. And thankfully, the response is more or less textbook Keynesianism too. So we'll get some good reviews and tests down the road. But what has happened so far is exactly what Keynesians expect (which is why you're seeing such a resurgence).

Savings are not scary. Excess savings with zero interest rates (this is called a liquidity trap) are scary.

It is entirely the Keynesians who claim this is all textbook Keynesianism. Austrians say it is textbook Mises-Hayek:

http://mises.org/story/3194

The Austrian case is that the earlier zero-interest-rate period under Greenspan short-circuited the economy's path toward liquidating the over-investments that had been created by prior monetary stimulus, and created a new bubble leading to the new "crisis." The zero interest rate you are concerned about here is entirely artificially generated by the Fed.

First, I'm the last one to hold back on criticizing Greenspan. But actually, Bernanke's policy right now isn't considered expansionary by normal interest rate targeting rules. But that's another discussion entirely.

Let's concede that these zero interest rates aren't "real" - ignore the fact that we're seeing zero interest rates across the board. It's still the rate that people are borrowing at. IF you're correct and Bernanke just pulled this out of thin air, then why do we still have savings in excess of investment? Even if Bernanke WERE faking it, you'd still expect investment demand to spike in response, right? I mean, it may be an artificially derived zero, but it's still a binding zero interest rate, right? And yet the market for savings still isn't clearing.

THAT'S the whole problem. Even if I concede to the "Fed as bullsh*t" view of central bank illegitimacy you still have a situation where savings exceeds demand for savings at an actual real life zero interest rate (artificial or not).

Where is the pressure going to be released now if not in the interest rate? That is the question that Keynesians try to answer. And it's a red herring to criticize their response by saying that the market will clear because interest rates will responded when interest rates have already responded and can't respond any further.

Anyway - that's the argument. I don't want to fight it out too much further. I just want to encourage you to recognize that Keynesians aren't saying that the market won't adjust - they're saying that it can't adjust in this circumstance.

Why does the circumstance exist? Because of the Fed. Would interest rates be at zero without the actions the Fed has taken over the last year? I doubt it. The liquidity the Fed has pumped into the economy is crazy. As far as why we have savings in excess of investment - I don't know what goes into determining that that is the case, so I can hardly answer. As I said, I am no economist.

Your argument isn't even consistent.

On the one hand you say that everything will be ok because interest rates will lower, and then on the other hand you say that they're low because the fed made them that way. Make up your mind.

Besides, paradox of thrift is a theoretical idea as well. My point was that the question still applies - if there was no such thing as a Fed and market interest rates reached zero, what would you do? Would the market clear? No - there would be excess savings and depression.

Where do you find me saying that everything will be ok because interest rates are lower? I said I thought that the interest rate would either rise or fall until demand met supply.

If there were no Fed, would the market interest rate ever reach zero? Are there instances of that before 1913?

<No - there would be excess savings and depression.>

Since we have zero interest rates now, does that mean we are in a depression?

OK - please overlook my unnecessarily casual "everything will be ok". How do you expect supply to meet demand as a result of an adjustment in interest rates if the interest rate is zero? Even if it's made to be zero by the Fed, investment should still respond to that shouldn't it?

I suppose my question could be: "why do you assume the equilibrium point is at a point where interest rates are positive?

Regarding depression - I bet historians will end up calling this a depression, yes. Obviously not as bad as the Great Depression, but it is qualitatively different from other recessions.

Emotional might not have been the right word, but the fact that Austrians always think Keynesians are making a value-judgement about savings was what I was refering to. I never understood that, particularly in light of how much emphasis prominent Keynesians like Solow always put on savings and capital accumulation. Perhaps you don't like Keynesians because you're unfamiliar with them :)

Some of that Austrian critique was probably unfair. I personally don't like accusations of assuming that something will "always" happen, so I shouldn't level the accusation either. It's officially retracted.

But I don't see too much difference between: "I believe the interest rates serve to balance supply and demand here" and "it is erroneous to contend that Austrians contend that the supply of savings will always create a demand for savings". After all - what exactly are you proposing that the interest rate is balancing? You claim that we can count on the balance of supply and demand in one sentence, but then take me to task for saying that Austrians say we can count on the balance of supply and demand.

In general, I would completely agree with you on interest rates sorting all this out. That's why I say paradox of thrift is a special case.

I am arguing that an Austrian would say that that savings cannot be in excess of demand, because the interest rate (when freely adjusting, not controlled by the state) adjusts to bring them to equilibrium. Understand, I am no economist, and it is quite fair to say I am no expert on Keynesianism. What I do know of the two, however, leaves me persuaded much more by the Austrians.

Oh I get that. And in normal circumstances I agree with you. There's a lot I like in the Austrian school.

Read my comment below and let me know what you think of it.

The clincher for the "there can be no excess savings" is the question of what happens when the interest rate is zero.

NORMALLY economists and laymen alike don't really consider this situation. But that's the situation in the market for savings right now.

An interest rate of 0 is like the price of any good being 0. Consumption will rise to pick up any perceived excess supply until the price is no longer 0.

Interest rates are not special when not price controlled.

In this case, borrowing will increase until savings become sufficiently scarce such that the interest rate is above 0.

If lenders don't want to lend, then interest rates cannot be 0 to begin with. QED.

But the situation is such that the equilibrium of supply and demand occurs below the origin. Think of it as a price floor. When you put a minimum wage in place do you say "consumption will rise to pick up any perceived excess supply until the price is no longer 0"? Of course you don't. Because nobody wants to consume any more savings (labor) below that price floor (imposed price floor in the case of the minimum wage, literal unimposed price floor in the case of zero interest rate).

In the case of the minimum wage price floor, you just have a persistent shortage that won't change until supply and demand curves shifts (not shifts up and down an unmoving curve, as you describe - but an actual shift in the curve itself).

The same is true of a liquidity trap. And what will finally shift the curves in a liquidity trap? Human and physical capital has to waste away during a depression to make investment demand pick up again.

That's one solution. But it's very different from "consumption rising" like you're talking about - it's an actual shift in the curve itself, not just in the quantity and price.

Another solution is to shift the demand for savings with government spending.

Either way, this isn't just a normal market adjustment process. That's the whole point - that's the whole problem. This is a true glut that requires a shift in demand curves, not just a shift along existing curves.

Interest rates below 0 being the equilibrium? Nice.

Do you also work for negative wages? Because I do have some work for you.

In any case, there is no market-only path that would result in negative interest rates needing to clear the market.

Oh you're so close! No, of course I wouldn't work for less than 0 dollars. That's the whole point. Banks won't lend out their deposits for less than 0% interest. That's the WHOLE PROBLEM.

Why do you have such a problem with an equilibrium below a price of zero? What's inconceivable about that? Supply of savings is what it is, interest rate is low - say 1%, then there is a very sharp negative demand shock, and voila - the equilibrium is now at -1% interest rates but actual interst rates can't go below 0%.

What's so hard to believe about that story robert_o?

Just to be clear - who is this "many of us" you're referring to? First you introduce yourself as a "card carrying economist", then you tell us that you aren't an economist at all and wouldn't clam to be a "card carrying one". Now, you think you're a prominent Keynesian.

It's getting hard to keep track of what you're pretending to be.

And when I said "many of us" I really just meant "many of us who are discussing these sorts of issues".

I don't know why you always feel the need to blow these things out of proportion.

occams razor leads me to a totally different conclusion, Danny. But thanks for the long-winded defense.

Whatever - keep on tilting at windmills, methinks.

LOL. That's precisely what debating you is like. Since you start out arguing for one thing and then switch sides and claim that you're deeply misunderstood when your position becomes uncomfortable. Talking to you is like trying to nail jello to a wall.

Haha. Do I switch sides or is your interpretation of what I originally said so off the wall that when I bring you back to reality you think I'm changing my argument?

This is a perfect case in point. Obviously I never once explicitly said I'm "prominent". What could possibly possess you to think I was implicitly saying that? I'm still not sure. But we've got a six comment exchange now because of your initial misconception.

Sometimes I misinterpret what you're saying, but how do these back-and-forths usually go methinks? Think about it.

DK: I agree but I think we've gotta worry about this situation and this may be an important exception.

Methinks: I can't believe you said XYZ!!!!

DK: I would never say XYZ, if you thought I did it came out wrong.

Methinks: No you said it!!!!! And you said you're a card carrying economist!!!!

DK: Well if you THINK I said it I'm just telling you now I really didn't!!!

Methinks: Now you're changing your position - how convenient!

DK: No, the point is I never said XYZ

Methinks: No but you said it!

DK: siiiiggghhh... where's vidyohs? He's starting to sound rational now.

I love the threaded comments.

The increased indention helps to highlight the most personal of discussions, and provide the most-heated with a chance to lovingly gaze at the whitespace to the left.

(breathe.)

;)

Yes... I agree :) and even for us heated-discussion-oriented folk (yes, yes, yes I know), it provides a GREAT upper bound on commenting that forces me to stop as it gets narrower and narrower. I actually don't like stupid back and forth believe it or not. I do like meaningful back and forth.

After a
while, it
forces
you to
use small
words.

Think of
it as an
improvement.

jello

nail

hammer

wall

I think I'm a prominent Keynesian?

No... I think you look too hard for things to make an issue of in the posts of people you don't agree with. Joenorton said "I'm not saying Keynesians universally think saving is bad", which was what I was responding to. I'd call myself a Keynesian. In no universe would I consider myself prominent - I'm not sure why you would assume that's what I'm saying, simply because he refers to "prominant Keynesians" elsewhere. Occams razor, Methinks... Occams razor. Most obvious explanation is I'm probably not claiming I'm "prominent" because I never gave any indication of thinking of myself as "prominent". You're making an ego issue up out of thin air.

Why do you keep bringing up this "card carrying economist" thing too. I said I mentioned that in the first post as short-hand for saying "I'm quite familiar with the material". But if that still bothers you so much (you've mentioned it several times in the last couple days), maybe it'll rest your conscience to know that I am a member of a professional economics association and I've presented research at professional economics meetings. So let's just christen me an economist (however junior, it seems fair enough) so you can stop fretting over this stuff.

I agree that the "stimulus" plan is unlikely to stimulate the economy for any period beyond the short-run (if that). Please don't misread my argument in this post as signaling in any way that I support such government spending (or planned spending!). I emphatically oppose it.

But there are (many) good arguments against "stimulus" spending. The fact that much of the "stimulus" funds remains unspent today is NOT among these good arguments.

Don,

I agree with you, markets are forward looking. However, another expectation of the stimulus is higher taxes and more "state capitalism", which paralyzes businesses and individuals alike.

Exactly, and in this case, rational expectations are clearly at work in both positive and negative directions, particularly with headlines like this:

Obama to raise 10-year deficit to $9 trillion

Boy! This one is a real stretch.

Yup :)

Businesses plan for the long term and make employment and investment decisions based on expectations of future demand. For some reason, we're always accused of forgetting this!

I think a general rule of thumb is that if anyone has said that it has worked or hasn't worked right now - they're both wrong! It's going to take a little time to say anything for sure. Maybe something qualified like "the stimulus saved some police and teacher jobs". You could probably say that and be safe. But otherwise... suspect everyone on either side!