Friday, January 9, 2009

economic "stimulus" as medicine, placebo, or blood-letting?

A mixed bag from the WP's Ruth Marcus in the C-J on the "art and science of (economic) stimulus"...

The stimulus package about to be unveiled is like an incredibly expensive experimental drug -- or, better yet, cocktail of drugs -- to treat a serious disease. No one believes the medication will be a complete cure; indeed, it is not guaranteed to alleviate the symptoms. The side effects could be serious and long lasting.

Also, 535 people get to determine the proper mixture of drugs and dosages. Very few of them are physicians.

So far, so good! Appropriate comments on the experimental nature of the proposal (vs. the implicit control group treament), symptoms vs. causes, the uncertainty of whether it will help or not, and theory vs. practice.

Yet without the medication, the patient is almost certain to suffer. Although costly, it offers the promise of some relief for the duration of the illness.

Not so fast. A better analogy would be to question whether the stimulus is a placebo!

As with the practice of medicine, the application of economic stimulus is as much art as science....the chances of wasting money by bad timing, not to mention bad policy, are high.

The art part of this is in the timing, the extent, and the various tools one must use. But she's assuming some vital science here-- a default position that stimulus will be stimulating, when in fact, it's typically moving resources from X to Y. In that sense, it's more like prescribing blood-letting as well as transfusions.

Beyond that, she asks some good questions about "stimulus"-- assuming you're going to go there.


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