Wednesday, September 22, 2010

Why Not Spoons?

Matt Yglesias writes in defense of inefficient stimulus:
This highlights one of the main problematic aspects of fiscal stimulus in general. When the economy is functioning healthily, you increase prosperity by finding more labor-efficient ways of doing things. Voicemail, cell phones, and email mean you don’t need as much administrative support staff to run an organization so the people formerly employed filling out little message cards go do something else with their time and overall production increases. But when your problem is an economy wracked by idleness and excess capacity and you’re trying to put people to work, this logic is turned on its head. The correct way to dig the foundation for a new building is to use a lot of machines. But if you’re merely trying to maximize employment to stabilize the economy, it’d be better to just rely on a huge number of guys with shovels.

Why not spoons?

Again, returning to long-term versus short-term time horizons, it makes almost no long run economic sense to go into debt to pay people to do things that are so inefficient.

And FLG wonders, if you keep worrying simply about current employment to the extent that efficiency becomes irrelevant, then wouldn't this impact the stimulus multiplier? If so, then doesn't that undermine the entire case for stimulus?

FLG guess there could be a high marginal propensity to consume among the people whom you are employing to dig with spoons, and so their spending may increase the multiplier, but would it be bigger than efficiency loss of digging with spoons instead of bulldozers? FLG seriously doubts it.

All told, FLG thinks Matt's short time horizon makes almost no longer term sense.

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