How . . . stimulating

By Megan McArdle

Are there any sweeter words in the English language than "The election is over?"  Starting tomorrow, I can turn my attention to things like budget deficits, and stimulus packages.

About which, I'm already confused.  Everyone, except me, seems to think that a massive stimulus package will improve things.  But as I learned it, the theory behind stimulus is that it expands aggregate demand by tapping into excess savings at home.  Instead of fruitlessly chasing too few investment opportunities, savings is helpfully channeled into consumption, smoothing the business cycle.  Else it expands aggregate demand by bringing in foreign savings that are not needed elsewhere.

But for the first time in, well, ever, we're flirting with an actual decline in global production; we will not be beseiged with flush foreigners looking to park all those nuisance profits.  And I don't think anyone believes that America has a problem with excess savings.  Given that, a stimulus package seems more likely to move money around into slightly different kinds of consumption than to actually expand aggregate demand.  One economist friend suggests that it might increase velocity--but that seems a rather slender thread upon which to hang one's hopes for economic stimulus. How large is the problem of money accumulating under metaphorical mattresses? 

But clearly, I must be missing something, because almost all the smart economists disagree with me.

This article available online at:

http://www.theatlantic.com/business/archive/2008/11/how-stimulating/4319/