Jasper Smith

Commentary on politics, economics, culture and sports.

Posts Tagged ‘stimuls

Hitlerian stimulus

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Yglesias takes Tyler Cowen to task for invoking the specre of Hitler and the Nazis to make an argument against Keynesian stimulus:

When a country produces more HDTVs, more people have HDTVs and living standards go up. When a country produces more tanks and military explosives, none of the tanks or military explosives go into private hands (we hope!) so living standards are unchanged. But producing HDTVs doesn’t increase your ability to conquer France, whereas tanks and explosives are useful for conquering France. Hitler’s policy objective was to prepare for conquering France. And his policies worked quite well (though Ernest May reminds us not to neglect the importance of French intelligence failures), they just served Nazi objectives. But I don’t see why Hitler couldn’t have spent the money on something else. If we use fiscal policy to raise measured GDP primarily through building tanks, we’ll have higher GDP and more tanks. But if we use fiscal policy to raise measured GDP primarily through repairing existing roads and building new mass transit and high-speed rail lines, then we’ll have higher GDP, better roads, and more mass transit and HSR systems. It seems to me that living standards would therefore be higher.

Right. I doubt living standards increased for most Americans during the war years, but nonetheless GDP was rapidly expanding. The economic growth was sufficiently robust (explosive, really) to finally jolt the country out of depression. Once the war was over, living standards could resume their ascent, as money for guns was channeled into money for butter.

We don’t have the luxury at the present time to agonize over slumping living standards. The task is to save the economy, and avoid deflation. Once things have returned to normal — a non-deflationary economy characterized by growth — we can hopefully get back to increasing living standards. Personally I expect that, for a while at least, such increases will be modest, given the need to increase savings over the long term, pay back debt (ie higher taxes) and put the economy on a long-term, sustainable path. Still, “modest” need not mean “none.” Ideally, we can increase savings and (modestly) increase consumption over the long term by limiting growth in consumption to a number slightly lower than GDP growth.

Of course, we can (and should!) also try and extract some gains in this regard for the vast majority of the population by tackling the income inequality issue.

Written by Jasper

January 2, 2009 at 8:56 pm