Handouts: Stimulating the Economy

The latest New Yorker and last week’s Economist both have write-ups on the stimulus package that was just approved in Washington. The Economist looks at the package from a global standpoint, and asks what (if anything) other countries are doing to stem the oncoming IMF-predicted global economic slowdown. The New Yorker questions the efficacy of the stimulus package itself.

The Economist sums up the stimulus package:

In America politicians and central bankers are focusing on policy stimulus. The Federal Reserve has cut short-term interest rates by 1.25 percentage points in recent weeks, to 3%. Financial markets expect another half-point cut at (or before) the Fed’s next meeting on March 18th. This week George Bush signed into law a package of tax rebates and temporary investment incentives worth $152 billion, or just over 1% of GDP. [link]

The New Yorker‘s James Surowiecki talks about the inception of stimulus packages:

Soon after Roosevelt was elected, the nation’s colossal unemployment rate and stagnant economy had him casting around for other solutions, including government-financed employment and public-works programs. At about the same time, the intellectual foundation for fiscal-stimulus plans was being laid out by John Maynard Keynes. Keynes argued that when fear made consumers and businessmen excessively cautious in their investing and spending, government could temporarily step in. Tax cuts or government-generated demand in the form of public spending could keep the country’s factories and service centers humming until the “animal spirits” of consumers and businessmen rebounded. [link]

The Economist on the IMF’s opinion on the stimulus package:

The International Monetary Fund, long a fierce advocate of budget discipline, has applauded America’s actions and is urging other countries to draw up their own fiscal plans in case the global outlook darkens. In addition to America, countries that make up a quarter of global GDP, the fund reckons, have the scope to cut taxes or boost spending. To reduce the odds of calamity, they should start contingency planning now…[but f]ew outside America, however, accept this logic or share the urgency. [link]

And finally, the New Yorker on the package’s efficacy:

Popular as Keynesian fiscal policy may be, many economists are skeptical that it works. They argue that fine-tuning the economy is a virtually impossible task, and that fiscal-stimulus programs are usually too small, and arrive too late, to make a difference. And since the money to pay for fiscal programs has to be borrowed and paid back in taxes, it’s a wash for the economy as a whole. If the government gives you six hundred dollars but you know you’re eventually going to have to pay six hundred dollars back in taxes, it may not feel like much of a gift. The economist Russell Roberts argues that using fiscal policy to get the economy going is like “taking a bucket of water from the deep end of a pool and dumping it into the shallow end.” [link]

Both articles are uploaded to the ‘Handouts’ section. Read ’em and weep…

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