Stimulus Dangers

People live in fear and worry about the length and depth of the current economic downturn. It’s no wonder that politicians and economists ponder ways to slow the rate of descent and cushion the impact at the bottom. Activism is trump. Above all, Americans have been singing the “jump in with both feet” song for months and accusing the rest of the world of timidity.

But it’s by no means certain that pumping government funds into the economy is the anti-recession miracle weapon it’s said to be. The desired salutary effect depends on the so-called Keynesian multiple, which is supposed to work somewhat like this: When the government pumps money into the economy to fill in potholes or paint schoolrooms, it is paid to the workers doing these jobs, who would be otherwise unemployed. These workers spend that money on breakfast pastries and automobiles, which produces jobs for other workers and gives them incomes, as well. Besides that, there’s now a need to produce shovels and paint buckets and this, too, creates income for other entrepreneurs and their employees. The multiple of 1.5 used by the United States government means that each dollar in debt the government puts into the economy is expected to eventually bring a $1.50 return. That’s how a public stimulus package miraculously sets a business cycle into motion and eventually pays off the debt incurred by the government.

The multiple isn’t the same everywhere

Whenever miracles are promised, people should be leery. Harvard economist Robert Barro reminds us that several years ago, anti-Keynesians also promised us such miracles with their “Laffer Effect” magic formula. That was a trick that was supposed to magically produce huge revenues for the state by way of cutting taxes. Unfortunately, that never really worked. Now the Keynesians are promising that their Baron Münchhausen strategy can transform our grandchildren’s debts tomorrow into multiple blessings for us grandparents today.

But even those inclined to believe in the magic of stimulus packages have to admit that the workings of the multiplier vary from place to place. Paradoxically, it may even be that pure Anglo-Saxon capitalism is better suited to Keynesian philosophy than are socialist states, like Germany. Shocks, like the current economic crisis, have a far greater effect on more open economies than they have on the pampered citizens of our welfare state. While here at home workers may experience reduced work hours or perhaps depend on stipends from workers’ cooperatives, many in the U.S. are just simply out of work.

“Don’t take advice from a quack.”

In other words, we here in Europe traditionally have enjoyed public employment and job re-training programs, which will be instituted in the U.S. only via the stimulation of Keynesian measures. And no one knows, by the way, how different populations will react to such a stimulus. It’s highly likely that the habitually thrifty Germans will set a major portion of the stimulus aside in case of even rainier days, something that would cancel out the desired economic stimulus brought on by consumption.

We can take two lessons to heart from all this. One of them is trivial, and the other not so trivial. The trivial lesson is “Don’t take advice from a quack,” and the less trivial lesson is, “Doing nothing is sometimes better than doing too much,” because doing the wrong thing is often more dangerous than failing to do the right thing.