Thursday, April 30, 2009

Prof. Courant on the Stimulus Package

Paul N. Courant, Economist

It was a pleasant surprise to find my erstwhile thesis adviser, Professor Paul Courant, blogging on matters related to economics, libraries and electronic publishing among other things (see Au Courant).

HIs post on the Stimulus Package, a masterpiece of clarity, begins:

Suppose that there were a major fire, and that in order to put out the fire you would need, say, a trillion gallons of water. Can you imagine a city council that would say, “oh no, we can only afford 734 billion gallons of water, so let’s leave out about a quarter of the neighborhoods. It’s the right thing to do because we won’t go into debt, and future residents will be better off for having had a quarter of the city burn down.”?

Or, for a better analogy, suppose that your ship is sinking, through a hole that is 10 feet in diameter. How about saving on repair costs but inserting a plug that covers only 75 percent of the leak? Sound like a good plan? Not so much.

The reason that we need fiscal stiumus is that monetary policy is impotent to provide sufficient stimulus (not generally true, but true now, and essentially no one disagrees with this view).

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