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So Much Money

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During the past few weeks I've spoken with several reporters about the "stimulus" plan.  Many of them offered to me some version of the following comment: "There must be something good about the stimulus plan!  After all, it's more than $800 billion.  Surely some good spending is included in this huge amount."

Overlook the fact that, if Keynesian theory is correct, what the government spends the money on is far less important than the fact that it spends the money.  The Keynesian idea is to increase aggregate demand.  So if the whiz-bang Keynesian wizards determine that the multiplier is 1.5767938563856302144, then government should spend an extra amount of $$ such that, when this amount of $$ is multiplied by this multiplier, the product equals the amount by which the same whiz-bank Keynesian wizards determine aggregate demand must rise by in order to restore full employment.

What amuses me is the presumption that (1) there necessarily must be some good spending in a plan that has government spend an additional $825 billion; and (2) that if there is some good spending in this plan, then it helps to give the plan legitimacy.

As Karol [2] points out about the first presumption, no one applies that kind of reasoning to their private lives.  If, for example, your teenager came home after spending the day at the shopping mall with your personal credit card and tells you "Hey Mom and Dad, I know that you told me to spend no more than $100, but I spent instead $10,000," you'd likely be furious.  And you would not be becalmed by your profligate teenager suggesting that, because he spent $10,000, surely some of it is wise.

About the second presumption: even granting (as I don't) that a spending package of $825 billion must contain some good projects, that putative reality justifies the spending package only if the benefits of these worthy projects outweigh the detrimental effects of the unworthy projects.  But such a result is hardly guaranteed by the fact (if fact it be) that some of the spending, taken separately, is worthwhile.