Sunday, February 15, 2009


February 15, 2009

I find myself in the curious position of finding merit in the position of the critics of the economic stimulus package that will be passed into law this week. I was schooled in the thinking of Maynard Keynes and taught to be critical of the Monetarism of Milton Friedman so beloved of Margaret Thatcher and Ronald Reagan. Nonetheless I am nervous about what is going on now. It is unclear to me that the idea behind the package is anything other than ‘putting lots of government (i.e. taxpayer) money into the economy will restore confidence and ‘stimulate’ all that makes it go’. If that is the thinking then many of the projects that were cut in the negotiation process were just fine because it doesn’t really matter where the money goes as long as it released for spending.

It seems to me that the confidence or trust that underlies the economy has been damaged and investors are not responding positively if the stock markets are a measure of confidence.

I’m all for helping people keep their homes and creating jobs. Those things make sense to me, but spreading out the pain of change over a longer period of time and at great expense does not make sense. It makes for more debt in the future doesn’t. I smell putting good money after bad and would love some help in understanding why I am wrong about that, which I earnestly hope I am.


Steve said...

We're in a paradox of thrift at the moment. I won't waste your blog space explaining it, because it's an elementary macroeconomics principle and can be easily understood by spending a little time with Google.

More tax cuts aren't wise at the moment if they're not followed by spending cuts. If you decrease revenue, you must decrease spending. In a paradox of thrift, tax cuts are a back-end solution to a front-end problem.

I don't disagree that government usually screws up everything it touches. But, we've forced the government's hand, whether by coincidence or by design.

Business gets money from three sources:

* consumer spending
* bank / investor capitalization
* government spending

People lined up to borrow money they couldn't afford to pay back and banks lined up to loan it to them. As a result, consumers have exhausted their resources and banks are now reluctant to lend more money to already distressed borrowers.

So who's left that has money to spend? The government, of course. But not really, because the government is borrowing it from China.

In a nutshell, we've painted ourselves into a corner and forced the government into the position of being the investor, lender, and employer of last resort.

The solution is going to be painful, whatever that solution may be.

-Steve Siedentop

Paul Davison said...

A big problem is that, to a large degree, the commercial economy has dried up and people are afraid to spend what they do have and banks are unwilling or unable to make even prudent credit available in the amounts needed to reflate the economy. If the government spends money on projects, people have to build them, companies supply parts and use the money they get paid to hire and pay workers.