Sunday, April 19, 2009

Now I Remember

There was a point I was trying to make in Friday’s discussion of policy that I couldn’t remember.

Here it is.

We were discussing generalities about recessions, policy responses, political parties, and the political spectrum.

In Principles of Macroeconomics, I talk quite a bit about how Keynesian theory suggests that we should raise spending and cut taxes during contractions, and cut spending and raise taxes during expansions.

I also talk about how the problem with that in systems with elections is that elected officials only seem to be good at the raising spending and cutting taxes part.

This means they are pretty much always pursuing expansionary fiscal policy.

The metaphor I use for this is that they are “caffeinating” the economy.

Pundits and politicians make a big deal about the different nuances in policies, but for my part, a lot of this amounts to arguing about whether you’re better off taking your No-Doz with Red Bull or a pail of your favorite cola.

Obviously, I’m being irreverent, but it’s worthwhile applying the metaphor to the events of the last 8 months. The primary criticism leveled at the Bush administration and the Greenspan Fed was that they stimulated the economy with too much spending (directed to the wrong places) and too low interest rates. The response of the Obama administration and the Democratically controlled Congress has been to spend more money, and to push liquidity on to financial institutions in the hope that they’ll lower interest rates and lend more.

If that doesn’t sound like substituting Coke for Red Bull, I don’t know what does.

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