Timely, Targeted and Temporary

In the last few days I have spent a lot of time thinking about the stimulus bill. Both the one proposed by the Administration and the one proposed by the GOP. Over the next few days I will begin to lay out some concerns for this approach. But here are some initial thoughts.

#1 -Do Stimulus Packages Ever Work? The premise of stimulus packages is fundamentally a Keynesian notion - i.e. that government spending will encourage non-governmental economic activity to pick up. For them to work they need to be timely (they need to respond to current conditions. They should also be targeted and temporary - addressing only those areas that need the stimulation and only a temporary boost. The evidence suggests that most stimulus packages, going back to the massive expansion of government during the 1930s, are not effective in lifting the economy outside of the normal economic cycle. Most also seem to suffer from from a lack of focus - legislators are great at getting their pet projects called stimulus. One of the President's economic advisors (Christy Romer) has argued in a recent paper that all the attempts in the 1930s did not lift us out of the Great Depression. Robert Higgs of the Independent Institute, in a recent program on Econtalk, presented evidence that was true. Supporters of the proposals suggest that we cannot afford to "do nothing", that seems like a weak read based on past experiences of success.

#2 - Where are we in the cycle? We've had a tremendous dump in the world financial markets and how do we respond? Markets are inherently volatile. They go up and down. But any person's ability to project where we are in the cycle of markets is notoriously limited. The risk of injecting something at the wrong time offers the real possibility of encouraging an inflationary cycle which could be substantial. Hayek's notion about the "knowledge of time and place" suggests that we should be very cautious about centralized solutions.