Krugman Assumes One Must Act
the opponents of a strong stimulus plan don’t really have an alternative to offer.
Here’s an alternative: nothing. Like when a nervous mom takes her precious 12-month old to the doctor because he has a cold, the best thing the doctor can do is nothing. Maybe a placebo. So too for the economy.
They don’t even have a really coherent critique; as Brad DeLong points out, if you believe that a surge in private spending would raise employment — and even the critics agree on that — it’s very hard to explain why a surge of public spending wouldn’t have the same effect.
The difference between an increase in private investment spending, and government spending, is like the difference between pushing an old lady down and pushing her out of the way of a runaway train. private investment is the result of millions of individuals making decisions based on their wealth and profit expectation; the other is simply someone spending other people’s money to help other people get jobs.
In a complex system, injecting more of an endogenous quantity that is correlated with something good invariably causes feedback effects, most bad, because complex systems tend to be optimized, and so the ‘total derivative’ in futzing with some input is usually negative (though the first partial often highly positive). This is why we do not suggest one take serotonin supplements, even though higher levels of serotonin are correlated with success and high status. Testosterone is known to have many positive qualities for men, but the best ways to generate a higher level of testosterone is to exercise regularly, including weight training, avoid insulin spikes, get your body fat low, and get good sleep. A bad way would be to inject it into your bloodstream. This is because the latter invites your body to decrease the amount it makes, and the net effect is usually negative.
Similarly, taking money away from some people for make-work projects creates jobs, but these are taking away money spent on something else, so the net is often negative. Further, unlike natural demand, the incentives of the workers are not necessarily so good for ‘natural’ jobs we would like them to eventually get.
It’s funny how many economists do not really believe in the Invisible Hand, except for trivial applications.