Can Stimulus Next Year Affect The Economy This Year?
Thursday July 16, 2009
In response to More Bad Pro-Stimulus Arguments, Demosthenes writes:
What are the possible behavioral responses to anticipated future stimulus. Four immediately come to mind:
Note that according to the traditional Keynesian narrative, responses #1 and #3 would cause future stimulus to positively affect the economy today. However responses #2 and #4 would cause future stimulus to negatively affect the economy today.
I don't know which effects would be larger in magnitude - I don't know if anyone does. There is no reason to believe that future stimulus necessarily has a positive effect on the economy, let alone a large one.
Unless people anticipated that the stimulus would help in the future, and make decisions based on that anticipation.I do believe stimulus next year can affect stimulus this year - it is a topic that Garth Brazelton and I have discussed at some length. But I stand by my earlier statement that:
There is absolutely no evidence that stimulus had any net positive effect on GDP. None. There is also no coherent theory about why stimulus spending coming in 2010 (which most of it is) would have an effect in 2009. None.I have yet to see such a model or narrative. If you have one, please forward it along.
What are the possible behavioral responses to anticipated future stimulus. Four immediately come to mind:
- Great! The government is stepping in and the economy is turning around. I feel relieved.
- Oh no! The economy must be in worse shape than anyone thought if we need that much stimulus!
- Great! The government is going to start awarding construction contracts a year or so from now. Our construction company better start hiring workers today.
- Oh no! That means the government is going to run a huge deficit. Tax rates are going to have to go up in the future. I better start saving for a big tax bill.
Note that according to the traditional Keynesian narrative, responses #1 and #3 would cause future stimulus to positively affect the economy today. However responses #2 and #4 would cause future stimulus to negatively affect the economy today.
I don't know which effects would be larger in magnitude - I don't know if anyone does. There is no reason to believe that future stimulus necessarily has a positive effect on the economy, let alone a large one.
Comments
Of course the stimulus package will help. But I think what will really help is a restoration in consumer confidence, part of that is getting banks and other credit lenders in line, which Obama is already doing.
Of course all standard macro models predict this. You know, the ones Mankiw used to run all the time. Not that this is not an overwhelming statement of confidence as none can predict a recession to begin with. It is however, far from nothing.
Of course the stimulus theory will help us. i will see that that theory help the consumer confidence, in the field of financial, which obama is already.
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