What kind of stimulus?

In an article in the Financial Times Martin Wolf argues that "Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge." That is a clever formulation that restates a set of arguments that Hayek had with Keynes in the 1930s. Hayek argued that the "technical" challenge was indeed the wrong metaphor. He did so in a number of venues. In The Fatal Conceit he explained the inability of centralized policy makers to get all the necessary data correct to accomplish those technical adjustments. The fatal conceit was that anyone or any group of experts could account for and manage the manifold variations in the economy. In The Uses of Knowledge in Society he argues for something called the "knowledge of time and place" which explains why the sum total of individual decisions is often better than centralized decisions.

The issue for many on the stimulus package is whether an additional injection of almost $1 trillion (on top of the TARP funding and the auto bailout and other commitments) will actually restimulate the economy in a reasonable way that will not induce significant inflation. Many economists argue that a total stimulus package, financed mostly with government debt, that equals more than 10% of the GDP is likely to prove quite inflationary.

Wolf argues that "As was the case in the 1930s, we also have a choice: it is to deal with these challenges co-operatively and pragmatically or let ideological blinkers and selfishness obstruct us." I agree, but with he ignores the compelling evidence that the very same tools that FDR used in the 1930s so ineffectively, will do anything more than they did then, now.

While there are real problems to be solved, repeating prior failed policies are not the way to do it. Not surprisingly the talk of a huge stimulus package has generated a group of "pigs at the trough" all arguing a) that their sector (be it zoos or auto makers - both of which have argued for some of the federal booty) are so critical to the economy that they will be able to miraculously pull us out of this slump, and b) that more regulation will solve the problems of variations in the market. There is a role for governmental policy here just not as robust as Wolf or his fellow exuberant Paul Krugman would claim. (One wonders why Krugman who called this recession about 20 times before we actually began to decline would be listened to anyway - but that is another story.)