Economic Stimulus (From a Layman Perspective)
by Inoljt, Mon Nov 02, 2009 at 05:54:02 PM EST
By: Inoljt, http://thepolitikalblog.wordpress.com/
There is something very fishy with Keynesian economics and the theory that government stimulus best fights recessions.
Before I continue, I should note that I am entirely unqualified to offer this critique of a fundamental economic tenet. I do not have a Ph.D in economics; nor do can I offer any alternative to combating recession. Nevertheless, here are my non-intellectual thoughts on the matter.
The best test of an economic principle (or any principle, for that matter) is in the field - in real life. For example, reality contradicted the economic theory that financial markets are rational in a particularly memorable way. On the other hand, reality supports the principles of supply and demand.
As far as I can tell, the "reality test" for economic stimulus has had quite mixed results. Two stimuli come off the top of my head: Franklin Roosevelt's New Deal and Japan's response to its 1990s housing bubble. The New Deal, while popular and praised to this very day, did not end the Great Depression. Likewise, Japan's stimulus also did not stop its Lost Decade.
Supporters of Keynes, in response, assert that both Roosevelt and Japan needed even more stimulus; both cut back government spending when they should have spent even more.
To me, this argument recalls the saying, "The definition of insanity is doing the same thing over and over again and expecting different results." It's as if a medieval doctor proposes "bleeding" a sick patient. Upon seeing that bloodletting is not working, the doctor concludes that the patient needs even more bloodletting - when in reality the doctor's "cure" is only making the patient sicker.
The analogy is probably exaggerated; after all, WWII government spending did end the Great Depression. As stated before, the "reality test" has not proven one side right.
What is certain is that more test results are upcoming. The general response to the Great Recession has been economic stimulus; we shall see whether or not it works fairly soon. I hope the evidence goes against my suspicions. I fear it will not.