The Congress and the Fiscal Cliff

A Clunker Stimulus?

Feb 15, 2012 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Economic History, Government, Households, Macroeconomic Measurement, Thinking Economically, Uncategorized • 204 Views    No Comments

It would be so nice if we could say, “Yes, the 2009 stimulus was a good idea,” or “No, it was not.” Instead, the debate continues.

Discussing his new book, journalist Michael Grabell tells us that we are unnecessarily dividing ourselves between government believers and disbelievers when the focus should be on designing programs that work. Grabell says the problem was not the $787 billion. Stimulus planners chose the wrong “shovel ready” projects. States were unprepared for a tsunami of money.  As a whole, the initiative had inadequate “oomph” to create a sustainable recovery.

Where did it work? He says to look at Cash for Clunkers, the program that paid us to trade in our old, emission spewing jalopies for new models. Grabell says the program successfully stimulated car production and supported car dealers.

Not everyone agrees.

An op-ed in the Boston Globe described why stimulus dollars made used car prices soar. On the supply side, car dealers had to destroy the old gas guzzling vehicles they received. On the demand side, with joblessness soaring, more people needed cheaper, “pre-owned” transportation. Less supply? More demand? Equilibrium price rises.

As you can see, the facts abound to applaud or condemn the impact of the 2009 Stimulus Act . Sometimes I even wonder which comes first, the facts or the conclusion. Exhibiting “confirmation bias,” first we walk in with our bias, and then we find a slew of facts to support what we believe in.

The Economic Lesson

In his General Theory on Employment, Interest, and Money, British economist John Maynard Keynes said that nations should borrow during a recession. Then, by using the money to “prime the pump”, fiscal activism stimulates business expansion, the recession ends, government revenue surges, and the debt is repaid.

An Economic Question: How might “confirmation bias” affect your economic analysis about the impact of government spending?

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