Update:  Welcome, DeLong and Krugman readers!  Response here.

Ryan Avent writes about the possibility of an economic "placebo effect" from the stimulus.

But the underlying point is intriguing -- that much of the value of action may be psychological. Even if a government plan isn't directly contributing to public welfare, the idea that something is being done which will improve things will encourage people to spend, businesses to invest, banks to lend, and so on.

This gets at something that another participant, Robert Shiller, calls the "confidence multiplier," of which he says:

The focus has to get off of "what fraction of this stimulus will be spent" to "how does this stimulus affect confidence".

This is worth considering when we read that Americans are strongly in support of significant infrastructure investments. I know that I've been all over the map in terms of what the stimulus should include and how it should be structured, but it does occur to me that authorizing a plan to move forward on major infrastructure projects, even if we know those projects won't come online in the next year or two, could have strong, immediate beneficial effects for the economy (in additional to the long-term effects of the value added by the infrastructure). Critics may note that we'll wind up spending money after the economy has already recovered, but of course, that's less of an issue when you're building things that need to be built in any case.

The real question, I think, is how close the permanent income hypothesis is to being true.   The basic idea is that people are forward looking, and they try to smooth their consumption over time.  So if you give them a "temporary tax cut", they save most of it, knowing that eventually they will have to give the money back.

But of course, this should also be true of "temporary government spending"--if people think the money won't be there next year, they'll salt as much of the money away as possible.  This is a topic very underexplored in the various estimates of the stimulus multiplier, even though consumers are massively overleveraged and will presumably save as much of their new income as they can.

Tax cuts give conservatives great confidence, of course, just as spending makes liberals with great faith in the power of the government feel all shiny and happy and optimistic.  The question is how much faith others put in those nostrums.



But the underlying point is intriguing -- that much of the value of action may be psychological. Even if a government plan isn't directly contributing to public welfare, the idea that something is being done which will improve things will encourage people to spend, businesses to invest, banks to lend, and so on.

This gets at something that another participant, Robert Shiller, calls the "confidence multiplier," of which he says:

The focus has to get off of "what fraction of this stimulus will be spent" to "how does this stimulus affect confidence".

This is worth considering when we read that Americans are strongly in support of significant infrastructure investments. I know that I've been all over the map in terms of what the stimulus should include and how it should be structured, but it does occur to me that authorizing a plan to move forward on major infrastructure projects, even if we know those projects won't come online in the next year or two, could have strong, immediate beneficial effects for the economy (in additional to the long-term effects of the value added by the infrastructure). Critics may note that we'll wind up spending money after the economy has already recovered, but of course, that's less of an issue when you're building things that need to be built in any case.

The real question, I think, is how close the permanent income hypothesis is to being true.   The basic idea is that people are forward looking, and they try to smooth their consumption over time.  So if you give them a "temporary tax cut", they save most of it, knowing that eventually they will have to give the money back.

But of course, this should also be true of "temporary government spending"--if people think the money won't be there next year, they'll salt as much of the money away as possible.  This is a topic very underexplored in the various estimates of the stimulus multiplier, even though consumers are massively overleveraged and will presumably save as much of their new income as they can.

Tax cuts give conservatives great confidence, of course, just as spending makes liberals with great faith in the power of the government feel all shiny and happy and optimistic.  The question is how much faith others put in those nostrums.

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