Wednesday, January 06, 2010

I don't like massive government 'stimulus' programs but that doesn't mean I need to accept all of the arguments given by anti-stimulus folks.

Recessions are caused by people with money choosing not to spend their money and recessions end when people with money choose to start spending their money. And just as government - and government spending - usually plays a big part in the events that cause people with money to stop spending, so too can government spending play a part in creating an environment in which people with money again feel comfortable spending their money.

Repeating a theme that I have made many times, much of the economy - and life in general - is driven not by such traditional measures such as used by economists and market theorists but rather by the emotions of consumers and employees and employers. When people feel nice and warm and comfortable, they act in ways that result in a growing economy. And when they don't feel so warm, they act in ways that result in economic contraction.

For the past year, people have been scared and their actions have reflected that fear and as a result, the economy has greatly slowed down as consumers and businesses have both cut back on spending.

And the recession won't truly end (as measured by perception and not by economic statistics) until people not only stop being afraid but actually start getting that warm feeling back.

Given this, there are actions that government can take and spending it can incur that helps people and businesses shed the fear and start feeling more optimistic about the future.

For example, spending on anti-terrorism programs can help, especially in a time when people are afraid of being attacked (note: the relevant fear is not that someone fears being killed in an attack but rather the fear of the economic consequences of such an attack). To the extent that people are sticking money in mattresses in fear of an attack, spending on programs that are perceived to have value in deterring attacks and in limiting the damage from any successful attack would have a positive effect on the public's emotional state and thus the economy.

It isn't surprising that professionally trained economists tend to dismiss my arguments, it doesn't speak well of their having chosen to spend tens of thousands of dollars on an education that teaches them to gather and analyze all sorts of economic statistics if economic policy can be broken down to something as simple as 'things are good when people are happy so let's try to keep people happy as long as possible'.

And the reason I don't like government stimulus programs? Because they're not done properly. They are done in ways that do nothing to boost consumer and business confidence. One time tax rebates don't make people feel more confident. Lowering tax rates is good as tax policy, but lower tax rates aren't going to lead to businesses hiring if they don't think they're going to make the profits. Spending on government projects - even 'shovel ready' projects - doesn't reassure the public that their job prospects aren't in trouble. They may keep people off the unemployment line but recessions aren't ended by reducing layoffs, they're ended when hiring picks up... and government spending, at least the spending contained in the various stimulus bills, doesn't lead to companies starting to hire more employees.