Sanity Injection

Injecting a dose of sanity into your day’s news and current events.

Obama’s stimulus package: Will it work?

Posted by sanityinjection on January 7, 2009

Peter Ferrara over at the American Spectator says no, and explains why in detail:

http://spectator.org/archives/2009/01/07/tax-cut-mirage

Ferrara’s main point is that a tax rebate paid for by government borrowing does not boost the economy the way a cut in tax rates would. It’s the difference between a Keynesian tax policy and a supply-side one. He also goes on to examine the other aspects of the proposed stimulus bill, and suggests alternatives.

It’s a good piece of writing and makes some very good points. Ferrara even allows for the possibility that the economy could improve on its own in spite of whatever the government does. However, I think he overstates the case just a bit. Like many writers who are firmly wedged at one end of the political spectrum or the other, he’s not as rigorous in scrutinizing his own ideas as he is with those of others. For example, Ferrara claims that reducing the top marginal tax rate would create an “economic boom”, although I’ve seen persuasive arguments to the contrary which he does not address.

Ultimately, the biggest effect of the stimulus package may be a psychological one. Voters have yet to be disillusioned out of their faith in the new President, and he is offering a solution. If they believe hard enough that the solution will work, then it might work even if the fundamentals aren’t sound. Why? Because what economists can never bring themselves to acknowledge is that the modern economy is far more affected by public perception than by reality. This is best observed in the stock market, where until recently inflated price/earnings ratios were the norm, and where the effect of a company’s quarterly financial report on its stock price is not based on whether the numbers are black or red, but whether they are better or worse than what the financial prognosticators predicted.

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