Obama’s Stimulus: Economists Say No!

From the wonderful freedom fighters at Cato (where I had the privilege of interning back in 2004):


This full page ad was placed in all major newspapers accross the US. Let’s hope policymakers pay attention. Or at least know how to read.


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4 Responses to “Obama’s Stimulus: Economists Say No!”

  1. Adam Says:

    I wish someone would do something like this in Australia.

  2. S Says:


    The same economists who put their name on this list, are the same economists who weren’t able to predict this crisis. So, what authority do they have to tell us whether the Obama stimulus package is bad or not, when they can’t even get the basic rights due to neoclassical dogma?

    Firstly, stimulus packages are necessary because if I am faced with a choice between a depression and stagflation, I’d choose stagflation. Stagflation was indeed caused by big government- it is the price we paid for avoiding a deep Depression. 750 000 jobs in construction were lost in two quarters in 1973-75 (as the housing boom ended in early 1973, well before the oil shock, which economist now agree could not have caused stagflation). Yet 1 100 000 government jobs were created in 1975- one in every six dollars spent was due to a local or state program, thus keeping the economy bouyant (traditionally, we would see 20% unemployment lasting over a decade, due to the 18 year real estate cycle). The market immediately rebounded.

    Second, once a debt deflation spiral occurs, not only will it take DECADES to fix (Panic of 1873, Japan in 1990, Great Depression in 1929 etc)- because people pay of debts rather than consume, wealth effects diminish etc (the more debtors pay, the more they owe [due to a swelling dollar]). We need inflation and huge deficits. It is a great thing BUT ONLY in a time of economic crisis. Let’s think about it- during 1975 corporate profits ACTUALLY rose in addition to debts being repaid, allowing for fresh investment in the future. Simple logical excerise: a mild inflation, without monetary rate hikes, helps repay debts quicker (which are nominal). Furthermore, because the money supply is endogenous, rather than exogenous as your friend Milton “Fraudman” thinks, state created money helps keep the private sector flowing (as state money is slightly different than bank money- suffice not to go into too much detail, but am more than happy to provided journal article proving this is the case). Suffice to say, the fact monetarism was an abject failure (the central bank target inflation of 5% ended up being 22.3%- the governor more or less conceded the money supply is endogenous while interest rates are exogenous).

    Recessions occur because while the free market is fantastic at allocating consumer goods and capital goods, it is shit at allocating assets, with or without government intervention- when this misallocation is exposed we get an Austrian style depression (but not for the reasons Austrians’ think). The Panic of 1893 in Australia proves this (we had the freest banking system in the world, and our biggest depression). In fact, abolishing the central bank will not solve the problem. A simple empirical test verifies this. If it is central bank intervention that causes a credit boom, we should see M0 being created before M1-3 (so the bank sows the seed, which allows banks to lend credit). In fact, credit creation (M2, M3 etc) LEADS the cycle (by a full year), it does not lag it. Most of the credit creation is entirely private.

    Fracitonal reserve banking is therefore the problem: government intervention therefore keeps the financial system afloat.

    Finally, let me say that there is government intervention I do disagree with- needlessly inflating and causing a property bubble to inflate further through various busidies, lowering interest rates to artifical levels only for the next boom and so forth- I agree less government intervention during a boom is the right policy prescription, but during a bust the state has a moral, democratic and economic imperative to prevent 25% unemployment.

    As such, your views must be dismissed, suffice to debt the rate of deleveraging is huge that government cannot easily replace the private sector debt at once.

    Policy prescription: double all prices, double all wages, have huge investment works, cut payroll taxes.

  3. S Says:

    *suffice to say

  4. S Says:

    ps I recommend as a good starting point Hyman Minsky’s “Stabilising an UNstable Economy”, 1986 (Chapter called “Economic Experience”).

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