Stimulus thinking

Nice to see David Leonhardt take on the neo-Hooverites.

The objections to stimulus tend to come in two forms: Its costs are too high, and its benefits too small.

Mr. Topolanek and German officials have been pressing the first argument. They say that the additional government spending can lead to inflation and government debt. The Weimar Republic of the 1920s, where inflation helped lead to Hitler’s rise, casts a long shadow.

Stimulus opponents here in the United States — mainly Congressional Republicans (though not, tellingly, Republican governors of some large states) — have been warning about debt, too. But they have also been making the second argument. When the government spends money, they say, it simply displaces spending by the private sector. Republicans on Capitol Hill have taken to citing a recent book by the journalist Amity Shlaes, “The Forgotten Man,” which claims the New Deal didn’t work.

Theoretically, neither of these arguments is crazy. But they don’t have much evidence on their side.

The best takedown of Ms. Shlaes’s thesis came from Eric Rauchway, a historian, who pointed out that her favorite statistic did not count people employed by New Deal programs to be employed. Excluding the effects of the medicine, the patient is as sick as ever! [sic]

When Roosevelt stuck to a stimulus program, unemployment fell markedly, and the biggest stimulus of all — World War II — did the rest. It’s true that economic models say the economy shouldn’t work this way. When resources are sitting idle, businesses should find a way to use them profitably. But they often don’t.

People become irrationally pessimistic during a downturn. They are driven by what Keynes called animal spirits. Only government can typically change the dynamic.