23 January, 2008

Stimulus and Response

Many people find this video immensely cute—it’s been seen around 35 million times on YouTube. I can’t understand what the fuss is about, but here you go:

So there’s stimulus—pingggg—and a response from the baby. But getting a similar rise out of an economy is not so easy—especially with the kind of shortsighted stimulus packages going around. Russell Roberts explains why:

The standard stimulus package doesn’t change incentives. It’s a check from the government. The hope is that the receiver will spend it. But when you just send out checks from the government, whoever gets stimulated is likely to be offset by someone who gets unstimulated.

The money has to come from somewhere. If you raise taxes to fund the plan, the people who are taxed are poorer and they’ll spend less. If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It’s like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn’t get any deeper.

It’s that Bastiat thing again.

(YouTube link via email from The Not So Talkative Man.)

Posted at 2:25 PM by Amit Varma in Economics