The Stimulus bill

Bryan Caplan wonders why Brad Delong cannot comprehend those who doubt the effectiveness of the stimulus bill.

Assume that creating value is easy, any brainless fool can do it, even the brainless fools at Washington Mutual. It is then immediately obvious that the government can make everything lovely by printing money and giving it to the morally worthy. Are car production lines shut down while unemployed workers idle? Just print money and give it to bureaucrats in government schools, or other similarly wise and worthy people, and lo and behold, those car production lines will start up again, and all will be well.

If, on the other hand, producing value is hard, then falling nominal GDP may well reflect the discovery that we were producing less value than we thought – that we were providing houses to people who were not in fact willing to pay for them, and building cars that were not in fact the cars that people wanted, in which case issuing enough money to stimulate the economy may well stimulate inflation, rather than the production of real wealth.

This brings us to Japan: Did Japan lose a decade because it refused to allow the free market to remove the power over assets held by incompetent people, or because it failed to borrow enough and spend enough?

Those who believe Japan failed to run a big enough deficit may well now get the chance to put their theory to the test in the US. If spending enough borrowed money to keep the incompetent running businesses stimulates the economy, then they will have proven themselves right.

Tags: , , , , ,

Leave a Reply