Oct 27, 2011 at 1:06 pm
Someone was just asking me about some right-wing talking points against stimulus that deserve a response—or at least a better analogy.
Critics like those at Heritage have used the analogy that stimulus spending is like taking water from one end of the swimming pool and putting in the other end. A dollar that the government spends on stimulus is a dollar someone else won’t be spending, so there’s no net gain.
This is a typical pre-Keynesian mistake which, if adhered to, mires the economy in recession when we should be applying fiscal policy to generate growth–growth that otherwise would be sacrificed by those who don’t understand the dynamics of the moment. It’s the kind of idea that drives Paul Krugman nuts, because he thought we’d already learned that lesson.
You see, the swimming pool analogy doesn’t work because it’s static—it ignores the dynamics…the actual moving parts in a real economy. A static economy would be one without cycles—demand would be effectively constant—and you certainly wouldn’t have demand contractions like the Great Recession.
Once you admit such cycles, then the static view disappears. It’s perfectly easy to imagine dollars sitting on the sidelines not getting spent or invested, and millions suffering unnecessarily because of it.
A better analogy is to think of the economy as a car and fuel as the demand that propels the car forward. The gas tank is empty, but we’ve got a tank of gas sitting on the lawn next to the car. If we put the gas in the tank, the car can get started and go somewhere.
Is there any more gasoline in the world? No. But we took the gas we had sitting there on the sidelines and used it to get the engine started.*
You can think of gas as the excess savings that won’t otherwise be absorbed because of demand contraction/liquidity trap. And yes, the government will borrow the gas from idle gas reserves across the globe—monetary policy helps here too, by lowering the cost of borrowing—and pay it back once we’re back on track.
The folks who refuse to understand or accept this dynamic analogy simply assume that savings always instantaneously equals investment, so the gas must already be in car. They’re like weathermen in a building with no windows, telling everyone that according to their computer model, it’s a beautiful sunny day, when in fact there’s a hurricane outside.
And it’s not just academic. It’s a tragic waste of human potential.
*The central bank may reasonably choose to print more “gasoline” at this stage, which also helps.
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