Bryan Caplan  

The Smart Way to Do Nothing

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Two Quick Points on Kling v. S... Collected Macro Lectures...
Here's a fair challenge from Surowiecki and The Economist's mystery blogger:
And as The Economist's mystery blogger noted yesterday, anyone's who's paying attention to the stock market knows what would happen if Obama announced today that he was abandoning his plans for a major stimulus package:
Markets would plummet, with significant knock-on effects, based on the actual news that government spending would not nearly close the American output gap, but also given the signal that America was no longer committed to serious stimulus.
This sounds right to me.  But the main reason that such an announcement would have scary consequences isn't that the stimulus package is intrinsically helpful, but that the announcement would provoke another psychologically-driven panic.  The trick is to reassure people without actually hurting them.  And as every Machiavellian doctor knows, that means placebos.  May I recommend a cocktail of tax cuts and charisma? 

P.S. Of course, if you want to do better than mere placebo, you could suspend the payroll tax...


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TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/1333
The author at Belligerati in a related article titled What sort of stimulus? writes:
    You have probably heard that Obama wants to borrow money to create a government stimulus of about a trillion dollars.I'm of the mind that it will contain too much meddlesome and expensive waste to be worth it. However, a lot... [Tracked on January 12, 2009 10:57 AM]
COMMENTS (9 to date)
MattYoung writes:

What if Obama proposed that any labor or property contract in the private sector was proprietary, none of the government's business unless the amount exceeded $100,000 per year? What would the stock market do then?

bjk writes:

The market likes weak dollar, inflationary policies. If the dollar goes down 50% and the market goes up 100%, your $1 in the market will buy the same number of imported bananas as before.

KipEsquire writes:

When stabbed, pulling the knife out is often not the cure.

But that does not mean that the right cure is another, bigger knife.

jb writes:

It's been very painful to come to the realization like mogden - that "belief" seems to have a huge impact on economic performance. That is to say, some economic beliefs become self-fulfilling prophecy.

For example, if people believe that stimulus will fix the economy, the application of stimulus will make them more confident. Which means they'll worry less, save less, and start buying/investing sooner. If enough people do that, others will become more confident and you have a recovery.

But you don't even need an actual stimulus - you just need people to believe that a stimulus occurred and will be good for them.

Mike Rulle writes:

This question of "fear itself" is mystifying. I cannot tell if it is an intellectual "punt" (the last refuge of failed economic analysis) or truly meaningful. Economic fear appears to be the Evil Twin of Keynes "Animal Spirits". How much of any recession is "fear itself"? I am attracted to the idea that at various times, quite a bit. But if so, what is with all this analysis of leverage, bad incentives, confused regulation, the distortions created by Government policies, and all the rest? Which matters more and by how much; "objective" factors, or our fearful reactions to them, including fear itself?

This is a pretty important question to get at least some handle on. Does the Economics profession study this problem? My impression is "no".

Maniel writes:

I believe we're making this too complicated. Investors - we're not all fooled all the time - like to see less money moving from the private sector to government. Tax cuts, spending reductions, reductions in interest rates, and so-called stimulus packages all have that effect, at least in the short term. Long-term investors would vote for reductions in government spending.

cm writes:

Question: What would happen if the government fudged all the economic numbers, making it appear that the economy is getting better? Would that be a placebo? Would it have negative effects?

The Cupboard Is Bare writes:

"Stated in the terms of the post, could the placebo effect outweigh the damage of the stimulus, if only the public believes?"

This reminds me of the part in "Peter Pan" where Tinkerbell is dying and people are told that they can save her if only they would clap their hands to show that they believe in fairies.

It might have worked for Tink and it might provide temporary relief for the economy; but in the long haul, pretending that basic economic principles can be bypassed is magical thinking and will only cause us to revisit this problem over and over again.

Marc Resnick writes:

I think you are right on with the idea that transfer of wealth to stock owners is not necessarily the best thing for the economy even as it increases stock prices. I also agree with the idea that it may be causing a placebo effect as well.

I think there is a third effect also. The stock market has increasingly become a measure of short term performance (quarterly earnings). So if the stimulus plan will boost the economy in the next sixth months at the expense of the future, this would also boost stock prices in the short term.

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