Will the fiscal stimulus work?

To channel Bill Clinton, that depends on what the meaning of the word work is.

Megan McArdle has a good analysis of the stimulus debate that also illustrates that you don't need mathmatical equations or graphs to engage substantive economic analysis... no need to get sophisticated when addessing fundamentals, like what does it mean to say the stimulus will "work." In short, an increase in GDP does not necessarily mean that the fiscal policy worked. Suppose, she offers, that we pay people to mow their own lawns. Then GDP increases but there is no increase in output. Neither does paying people to maintain their lawns make us more productive though it might help to cushion the impact felt by those who were (will be) laid off. Point: don't build roads to nowhere and everywhere just to get people employed. It would be better to simply transfer money to people or, as a second best option, to subsidize training or expand food stamp programs. Such transfers would increase GDP as well, via consumption, but that is secondary. Primarily it would be the state addressing questions of equity, trying to ease the pain of adjustment.

Sounds radical these days but it is a worthy question; should the government actively manage the economy? Economists are dueling over the efficacy of a fiscal stimulus and the range of expert opinion is great. Essentially those who are dubious of the power and wisdom of active fiscal policy are humble when it comes to understanding precisely the cause and the solution. Or, they, and I include myself in this group, see the solution as being beyond the reach of government. Perhaps one way to look at it is to say that a fiscal stimulus is an attempt to treat the symptoms of the recession - an attempt to stimulate consumption via borrowing when it was exactly that which contributed to the downturn. It would be better to focus on the things that led to the bubble in housing prices, better to stabilize prices, to prevent a deflation. The role of government should be to provide security, public goods, and to facilitate the smooth functioning of markets.

There is ample evidence that the market is working even as GDP contracts. Housing prices have fallen and will likely continue to fall to a point that is more in line with supply and demand fundamentals. Labor markets will clear eventually. In the short term there will be some pain and government can do something about that even as knee-jerk conservatives howl about re-distribution. They'd do better to howl at the arrogance of liberals who think that the government can manage an extraordinarily complex economy.