Wednesday, July 8, 2009

Fiscal policy as placebo

Robert Frank makes a placebo-effect argument for fiscal policy, something I have not seen before:
John Maynard Keynes once compared investing in the stock market to picking the winner of a beauty contest. In each case, it's not who you think will win, but who you think others will pick. It's the same for those trying to sort out the stimulus debate. The argument of stimulus opponents hinges on their belief that consumers and businesses will predict that stimulus won't work. The fact that stimulus opponents are far less numerous, have less distinguished academic credentials, on average, and are far less ideologically diverse than their counterparts does not guarantee they're wrong. But these factors should make rational consumers and investors less likely to side with them. And since this is really an argument about expectations, that's probably enough.
If we believe it will work, it will work.

(If he is consistent, he should be very harsh on the talking-down of the economy before the stimulus package was passed in February.)

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