A Great Supply-Side Takedown of Stimulus

Blog friend Everyday Economist has a comprehensive and well supported critique of the stimulus package (not that it had a lot of fans around ThreeSources to begin with).

First, in order to consume, one must earn an income that allows for consumption (even borrowing is based upon one’s income and credit standing). If one is not producing, one cannot consume. As we have previously detailed, this is the major insight of Say’s Law. Without getting into a discussion of which comes first, demand or supply, it should seem quite obvious that if Keynes is true and Say’s Law does not hold up in the short run and that government intervention could facilitate the lack of demand, it would only be admissible to follow such a policy if the benefits exceed the costs. However, a Wicksell-based understanding of intertemporal coordination suggests that the cost could be substantial given the potential subsequent macroeconomic discoordination. Thus, it is doubtful that the benefits of temporary stimulus could exceed the costs of future discoordination.

Second, financial news pundits love to highlight the fact that over 60% of GDP is consumption. Thus, it must follow that consumption is what drives economic growth, right? Wrong. GDP accounting is merely, as the name would suggest, an accounting device. Given the fact that GDP is the total of new final goods and services produced in a given year, it is hardly a surprise that a majority of those final goods would be consumed by a developed country. Discussing the share of GDP as though it were a predictor of relative importance is incorrect. The large consumption share of GDP is not a signal of begin the driver of economic growth, but rather a reflection of the prosperity in the United States. Economic growth is caused by technological innovation and productivity. The result of economic growth.

Read the whole thing. Send it to your favorite Keynesian.

Economics and Markets Posted by jk at March 10, 2008 11:42 AM