Who Do You Trust?

by Elaine Schwartz    •    Aug 5, 2010    •    598 Views

Moderated by late show host Johnny Carson, there once was a TV show called “Who Do You Trust?” Initially aired during 1957, the quiz show had husbands (interesting–1950s version would have only husbands making the decision) deciding whether they or their wives would answer questions.

With the current debate about the impact of stimulus spending, I thought of the show’s title. Based on “who” we trust, many of us select who we want to answer, “Is the stimulus working?”

For those who trust the Keynesian outlook, Moody’s Mark Zandi and Princeton economist Alan Blinder provide the right answers. In a recent paper, Zandi and Blinder conclude that the financial bailout had the greatest impact. Saying that the Fed’s asset purchases and bank stress tests were critical for the current economic improvement, they point out that stimulus spending alone would not have sufficed. However, they say that the complementary character of both sets of policies tended “to reinforce each other.”

By contrast, those who question the impact of government spending will gravitate toward Stanford economist John Taylor and Harvard’s H. Gregory Mankiw. Commenting on the Blinder/Zandi paper, Dr. Taylor says that they use an old Keynesian model for hypothetical data input. Never, he says, do they use current data on what actually happened–just what was supposed to have occurred.

There is lots more to read on both sides. For the Keynesians’ view, you might want to look at what the Councll of Economic Advisors and Paul Krugman have said. To read more of the market dominated perspective, Arnold Kling, Tyler Cowen, and Russell Roberts have noted their opinions. 

The Economic Lesson

To simplify our market economy, economists like to draw a circular flow model with 2 concentric circles. As shown here, essentially, resources and goods and services move around the outer circle while dollars occupy the inner circle.

The key, though, is that the Keynesians believe that during a recession we have to draw a huge government rectangle to help the other two. By contrast, those who believe the market should function with little outside help will depict the circular flow model with minimal governmental influence.

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