My earlier post appears not to be having its desired effect. What I am really curious to know is why people believe that fiscal stimulus "works" in the conventional sense; i.e., leads to a desirable increase in aggregate output and employment.
Personally, I do not believe this; that is, I remain unconvinced by the arguments people typically employ to support this belief. This does not mean that I believe that the contrary is true; it simply means that I remain agnostic.
But most people appear not to be agnostic on the matter; they appear to believe very strongly that fiscal stimulus works. Of course, there are some that believe very strongly that the opposite is true. I am not sure what accounts for their belief either, but I choose to ignore them. The burden of the proof surely rests with those that believe. If you want me to make a big earthly investment in relation to your belief in Jesus Christ, then it is up to you to convince me (it is not up to me to disprove the existence of God).
When I was an undergrad, I believed that fiscal stimulus worked. Why did I believe this? Because this was what I was told; and at that young age, I had no reason not to believe what my professor told me. Moreover, he could show me the "logic" of the argument by way of a simple theory (at that time, the IS-LM model). He could even point to WW2 as empirical evidence in support of the theory. This theory was further corroborated in my mind by the fact that policymakers, newspaper columnists, and many other economists said exactly the same thing. The "truth" of this matter was (and still remains) conventional wisdom.
I also used to believe that Lemming populations were prone to commit mass suicide by jumping off cliffs. Why did I believe this? Because this is what I was told; in particular, this is what Walt Disney told me in his Academy Award winning 1958 documentary White Wilderness. You can see the footage here. How's this for empirical evidence?
Naturally, almost everyone who has ever heard of the phenomenon actually believes it. The image of lemmings running off a cliff has become a popular metaphor for following a crowd in an unthinking manner; see figure above.
It was only many years later that I discovered that this "fact" was a myth. Even worse, the "Norwegian" lemmings shot by Disney were imported from Hudson Bay to Calgary, where they did not jump off the cliff but were, in fact, launched off the cliff using a turntable.
I suppose that the point I am trying to make is that we are all to some extent "slaves of received wisdom." This is unavoidable. But it is not unavoidable that we should let this defect prevent us from questioning the conventional wisdom handed down to us by our predecessors (and repeated in rote-like fashion by true believers). I am wondering to what extent the widespread belief in fiscal stimulus is similar in any way to what many believe to be true of lemming populations?
As I mentioned in my earlier piece, many (certainly not all) people appear to believe in fiscal stimulus because they can see how it "works" at the microeconomic level. For example, here in my home province of British Columbia, we can measure quite directly the impact on gross employment stemming from the government's decision to build several state-of-the-art "fast ferries." The shipworkers benefited; as did a number of related trades. And the incomes earned by these people in this endeavor were no doubt spent in a manner that "stimulated" other economic activity.
But while the impact on gross employment is easy to measure, the impact on net employment is not. This particular fiscal stimulus program cost provincial taxpayers close to $500 million. This is 500 smackeroos that was no longer in the hands of the people who earned it. This loss of private sector purchasing power must have surely depressed the demand for all sorts of goods and services; and by implication, depressed the demand for labor in many sectors of the economy. Moreover, some of that income that would have been saved to ultimately finance other capital expenditures, now found its way to finance a fleet of fast ferries. In short, the aggregate impact of this policy--if measured correctly--is not likely to have been very large. (Unfortunately in this case, it did turn out to be large, but in the opposite direction; see fast ferry fiasco).
It would be more persuasive, in my view, if proponents of fiscal stimulus promoted their belief on the basis of its redistributive effects; not its aggregate effects. There may very well be a good reason to advocate fiscal stimulus with the view of supporting various sectors in dire need of help. But this is a very different argument than asserting that (almost) everyone will somehow benefit. This latter argument may even be true; but like I said, I have yet to be presented with convincing evidence.
Brief Bio: Born in Vancouver, British Columbia. Flowering career in construction sector (drywall taper) aborted by severe recession (1982). Received Ph.D. in Economics from the University of Western Ontario (1994). Taught as a university professor for over 20 years. I now work in the Research Division of the Federal Reserve Bank of St. Louis and I write this blog mainly in my spare time (it is not a part of my formal duties). I welcome comments and (constructive) criticisms. Feel free to email me if you would like to discuss issues in greater detail.
Believe those who are seeking the truth. Doubt those who find it. Andre Gide