Thursday, January 15, 2009

Will Obama Hit the Ice Running?

Yesterday I posted "Some Questions...", the second of which concerned Mike Whitney's contention that Obama needs to start writing large checks to stimulate the economy as soon as his hands warm up enough from the Inaugural ceremonies. Fortunately my research (that is casually reading my usual morning blogs) led me to a satisfactory answer without even using google, on LRC, Scott Rosen "Has a Stimulus Ever Been Necessary?". In a nutshell:

"Even this pseudo-recovery did not last for long as the economy fell back into a depression in 1937. New Deal advocates insist that this was the fault of reduced government spending. In part, they are correct because so much of the "expansion" was merely a reflection of government expenditures. The decline in government spending, however, did not retard private commercial growth which, had never really recovered in the first place. Even if this was a true recovery, Keynesian theory calls for budget reductions during a period of expansion. Moreover, if five years of government spending truly resulted in economic recovery (as the New Dealers claim), it seems far-fetched to believe that a slight retreat in the growth of the government would plunge the economy back into a severe depression."


"The fallacy behind the call for economic stimulus is that declining aggregate demand is the mother and not the daughter of economic contraction. When left to its own devices, the market will return back to prosperity (consumer demand and all). Government intervention oftentimes has the effect of actually prolonging the crisis. The new administration would be wise to let the market adjust on its own and spare us the additional debt and debased currency that an active fiscal and monetary policy will yield."

I'm satisfied. (Except that I'd still like to know if Witney considers the massive Defense budget stimulus as effective as any other public works spending, or more generally, if some spending is more "effective" than others, questions of morality aside. For instance, a bridge or hospital may be used for many years while a cruise missile is only used once.)

No comments: