No time to post much today, so I’ll just pass along an interesting question and brief answer from the Econbrowser mail room.
A reader writes:
My wife and I were thinking of getting some work done on the house. I thought to myself that this would also be our civic duty since it would keep economic activity going elsewhere. Then I thought to myself that Paul Krugman plans to spend my money anyway– via government stimulus spending that would come out of higher taxes (at some stage). I can’t afford both new walls on the basement and landscaping for Princeton’s new Krugman Park.
a) Am I right that such Keynesian spending is essentially to force the hand of oversaving consumers sitting on their cash? (No doubt in our collective interest.)
b) If enough people think this through would they increase savings still further and cancel out the anticipated stimulus package? (If I understand correctly this is analogous to the rational expectations critique of the 60s unemployment-inflation tradeoff.) Or at least force much higher levels of government spending?
c) Would it therefore be better to ban all economics blogs, except for Econbrowser, so as not to confuse the semi-literate (such as myself)?
Here’s a quick stab at answering:
If you buy materials to redo your basement you’ll help my economy at least, since we just bought some Home Depot stock last week.
The premise of the Keynesian stimulus is that we’re at an inefficiently low level of total spending. According to traditional Keynesian doctrine, that could be changed either by increasing government spending (hire people to care for that park) or by lowering taxes (supposedly encouraging you to buy stuff from, say, Home Depot). And if the level of output is indeed inefficiently low, it’s conceivable we could have both better basements and a nicer park if the government acts wisely.
My own view is that there are more fundamental problems beyond the low level of total spending, namely, the financial system is broken and needs to be fixed, and until it is both our basements and parks may go wanting, despite the willingness of Congress to increase the deficit.
You’re all invited to elaborate below.