Stimulus More Psychology Than Theory

February 11, 2009 • Commentary
This article appeared on Marketplace on February 11, 2009

The government is about to spend $838 billion in taxpayer dollars on the premise that the economy otherwise risks spinning into a sort of death spiral. So how exactly is this supposed to work? The terrifying fact is that nobody really knows.

The president’s idea, in a nutshell, is that American investors and consumers are undergoing a self‐​perpetuating crisis of confidence, suffering from depressed “animal spirits,” to use John Maynard Keynes’ famous phrase. Consumers, fearing the worst, cut spending. And that hurts retail sales, which hurts profits, which leads to layoffs, which leads to a new round of anxieties for creditors and consumers. And on and on and on.

A big blast of tax cuts and government spending, a sort of economic shock therapy, is supposed to jolt us out of our self‐​reinforcing funk and put us on the happy path to recovery. In this Keynes‐​inspired view, anti‐​recession macroeconomic policy turns out to be a kind of government mood manipulation.

Sadly, macroeconomists are amateur psychologists at best. They simply don’t know which interventions reliably buoy consumer and investor confidence. Indeed, many leading macroeconomists say there’s little evidence that slashing taxes and boosting spending works well at all, even in theory.

And the massive stimulus package we’re about to get is far from a work of economic science. Harvard’s Robert Barro, one of the world’s most influential macroeconomists, says the bill’s tax cut and spending provisions are both “garbage.”

The idea is that stimulus will revive flagging animal spirits by actually priming consumption. But an ill‐​designed set of initiatives — a bunch of garbage — may do little more than run up crushing deficits that we’ll pay for in inflation or pass on to our kids.

President Obama did promise to bring us hope. Well, I’m doing my best to hope this works.

Media AppearanceWill Wilkinson Will Wilkinson says the deal may only be useful for psychological effect, if at all on Marketplace. (February 11, 2009) [MP3]

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