Tuesday, February 03, 2009


A lot of discussion surrounding the proposed stimulus legislation concerns whether it is too big or too small, whether it should focus on spending or tax cuts, whether the prgram will have the intended effect, etc. There is a much for fundamental question, however and that is: what is the one single thing that is needed for the stimulus to be a success? What is the fundamental condition necessary to begin economic growth?

It is at arguable that if you give people money to spend, they will not do so if they believe that they will need it for more important things later. That is the fundamental issue. What the economy for needs as a stimulus is for people to believe that the economy will grow, that if they spend money, it will be possible for them to make more. What the stimulus requires therefore is not a large infusion of cash that people will be unable to resist spending, it is confidence that spending is not an imprudent impulse that will lead to impoverishment down the line.

What the economy needs more than anything is for people to have confidence that their economic circumstances will be sustainable. This makes gloom-and-doom posturing in order to generate political pressure to pass the stimulus legislation counterproductive. What makes the economy grow is people producing products and providing services that are necessary or desirable. How much economic activity occurs is a result about how confident people are about their own economic stability, rather than their perceived need to spend whater funds thay might get their hands on. There are vanishingly few, if any, families that will stop spending money altogether if the economy worsens. There is going to be some baseline level of economic activity regardless of the stimulus, tax policy, unemployment or whatever. The economy will grow naturally when the demand for the things that people want and need impels others to supply them. Lenders will lend money to people who are good credit risks for transactions that are economically reasonable. Recessions end when normal, healthy and rational economic activity resumes following the imbalances and miscalculations of periods of growth. Growth resumes when money is once again used to allow the provision of services and the production of items that people have use for, not the sloppy and haphazard consuption that a panicked government seeks to impose upon its citizens.

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